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Inventory Drawdowns Won’t Boost Oil Prices

Cushing Oil Storage

During the next three months, various analysts expect crude oil inventory drawdowns to increase, providing support to crude oil prices. However, post-September, inventory build-up is likely to accelerate, putting a cap on the oil rally.

With expectations of restoration of Canadian supply, supply outages are likely to reduce. Oil production is likely to be supported by high oil prices while demand increase is already priced in. The main variable that will affect prices is the crude oil inventory, something which traders are likely to follow closely.

(Click to enlarge)

The chart above shows the seasonal crude oil inventory drawdowns from June to September. Even last year, crude oil drawdowns were large, yet the surplus continued to inch higher, which eventually led to a drop in crude prices. The current season starts with crude oil inventories at 531.5 million barrels as of 10 June, according to the EIA. The latest weekly drawdown was only -900,000 barrels against an expectation of -2.26 million barrels. Related: Slavery At Sea: The Ugly Underbelly Of Oil Shipping

The current inventory levels are 152 million barrels above the 2010-2014 average, according to a Deutsche Bank research report. The bank believes that after slow draws in the next two weeks of June, the drawdowns will increase from July and pick up pace in August. By September, they expect the inventories to reduce to 135 million barrels above the average.

The Bank expects a larger crude oil inventory drawdown of -2.88 million barrels every week, compared to the historical average of -1.65 million barrels every week, but it will be insufficient to notably shrink the surplus.

In order for the elevated inventory levels to reach historical norms by Labor Day, crude oil stocks will have to decline by 12 million barrels every week, according to S&P Global Platts analysis.

There are two important factors that can accelerate the drawdowns.

Gasoline demand increases during the U.S. summer season, but the gasoline inventory is 10 percent above the five-year average. Ample gasoline stocks are a deterrent to the refiners, who desist from turning crude oil into gasoline. A drawdown on gasoline stocks will encourage the refiners to pick up their utilization. Related: OPEC May Be Forcing Venezuela Into Regime Change

The current refinery utilization of 91.5 percent is lower compared to last year’s 93.1 percent. Hence, as the refinery utilization picks up in the summer, it will leave a greater scope for drawdowns to increase, according to the Platts analysis.

The second data to watch is the crude oil imports, which tend to increase during the summer season and then taper off at the end of the year. Deutsche Bank believes that as crude imports have not responded to the seasonal increase, it will remain subdued at 7.8 million barrels per day till the end of the year.

If the oil imports continue at 7.8 million barrels per day, the crude surplus will increase from 135 million barrels in September to 185 million barrels by the end of the year. However, if the crude imports drop to 7.2 million barrels per day, the surplus inventory will decrease from 135 to 123 million barrels.

Though oil imports depend on a number of factors and it is difficult to establish their combined effect, the declining contango has made storage of crude unprofitable. This might restrict oil imports during the rest of the year, but not to the extent needed to shrink the surplus.

Hence, the inventory drawdowns might only support prices rather than boost them a lot higher from the current levels.

By Rakesh Upadhyay for Oilprice.com

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Leave a comment
  • Chuck M. on June 20 2016 said:
    "If the oil imports continue at 7.8 million barrels per day, the crude surplus will increase from 135 million barrels in September to 185 million barrels by the end of the year."

    Respectfully, that math doesn't work. Let's assume imports stay at your 7.8 mbpd, exports stay at the current .49 mpbd, and production averages 8.45 mbpd (from the current 8.7 to the projected 8.2) and refinery production is flat to LY for the remaining 29 weeks of the year at 16.36 mbpd on average (it's actually up 1%+ YTD); or in the equation (7.8 - .49 + 8.45 -16.36 = -.6 mpbd draw). That's a 600 thousand bpd draw on average for the remainder of the year, or 122 million draw down in inventory from now until year end 2016. That draw down would still result in stocks slightly above 400 million by year-end compared to a 5-yr avg of about 384 million for year end, but it's close. That's why prices are rising.
  • mirriam ndunge on June 22 2016 said:
    informative.

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