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Matt Smith

Matt Smith

Taking a voyage across the world of energy with ClipperData’s Director of Commodity Research. Follow on Twitter @ClipperData, @mattvsmith01

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Oil Prices Under Severe Pressure As U.S. Inventories Near 500 Million Barrels

Forty-eight years to the day after David Bowie’s first single ‘Rubber Band‘ was released (??!!), and the crude complex is being stretched to the downside once more ahead of weekly inventory data.

Last night’s API report yielded a surprise 1.6 million barrel build to crude stockpiles, usurping expectations ahead of today’s EIA weekly report. A modest draw is expected from today’s report as refiners continue to return from maintenance; correspondingly a solid build to gasoline stocks is also in the mix.

It’s like our Christmases all come at once on Friday, with the double-whammy of Nonfarm payrolls and the OPEC meeting. The gang is starting to arrive in Vienna, with the usual ratcheting up of rhetoric hitting the news wires. Saudi oil minister Ali al-Naimi appears to be his usual prickly self; we’d be worried if it was any other way.

There’s an interesting piece in the Wall Street Journal today addressing the current oversupplied nature of the global crude market, although it is fairly dismissive that global inventories are getting full, pointing to the current structure of the futures curve for evidence.

The claim that near-term prices are not low enough to incentivize floating storage is legitimate, but it doesn’t explain away the current reality in the Gulf of Mexico: 51 vessels carrying around 38 million barrels of crude are sat waiting to discharge as of yesterday (h/t ClipperData). Nor does it explain the idling ships seen across the world recently, from Singapore to China to the Arab Gulf.

All the while, total US crude inventories sit at 488.2 million barrels, 105 million barrels higher than this time last year, and 2.7 million barrels shy of the all-time record of 490.9 mn barrels set earlier in the year. Mamma mia, that’s a spicy meatball of a level: Related: Saudi Cash Crisis Intensifies As Interbank Rates Soar

(psst….don’t forget we also have 695 million barrels stored in the strategic petroleum reserve, which equals 137 days of net petroleum imports – although the Senate and House of Representatives agreed on a deal yesterday to sell 66 million barrels of it from 2023 to 2025 to raise funds).

From one downbeat market to another, we take a look at Asian spot LNG prices. Lest we forget, Asia accounts for ~75% of the global LNG market, with Japan and South Korea accounting for 50% of the global market between them. Hence, as demand growth slows in this key region just as supply capacity additions come to market (from Angola to Australia, and not forgetting the US), prices have tumbled a further 25% this year to $7.40/MMBtu currently. Related: Can We Blame Hedge Funds For Low Oil Prices?

This is after already dropping a whopping 45% last year. Spot prices could fall to $5.70 next year, as further supply additions come online.

Related: Are OPEC Countries Creditworthy At $50 Crude?

Taking a look at overnight action on the economic data front, and preliminary Eurozone inflation for November has disappointed, coming in at 0.1% (YoY), below consensus of 0.2%. Core inflation also disappointed, coming in at 0.9% (versus 1.1% expected). This preempts tomorrow’s European Central Bank meeting, and the likely announcement of further stimulus measures.

Onto the US, and the thunder-stealer from Nonfarm Friday (aka the ADP report) showed job creation of 217,000, last month, some 27,000 better than the consensus. Other than that, there is a bit of a pause in the beginning-of-the-month data dump, with just the excitingly-named Beige book out later today. Inbetwixt then and now, dollar strength may be stoked by Fed head honcho Janet Yellen speaking – and of course, our dearly beloved EIA report.

Given dollar strength and an impending bearish inventory report, the crude complex is looking lower once more.

Finally, we take a look at things that are never gonna happen via Venezuela’s President, Nicolas Maduro. He wins the prize for the quote of the day, saying ‘the hour has come to put the oil market in order‘, confirming that Venezuela are to push for a 5% output cut from Friday’s OPEC meeting. Don’t hold your breath.

By Matt Smith

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