Oil prices sank on Thursday following fresh data showing oil and product stocks rising to an all-time high.
The EIA released its weekly data on July 20, revealing a slight drawdown in crude oil inventories. Crude oil stocks were down 2.3 million barrels, posting the ninth straight week of declines and adding momentum to a slow but steady oil market balancing. Still, oil inventories stood at 519.5 million barrels as of mid-July, about 60 million barrels higher than year-ago levels.
Combined, all U.S. crude oil and refined product stocks jumped to 2.08 billion barrels, an all-time high. This comes at a time of year when peak demand is supposed to draw down on inventories.
Part of the increase came because gasoline stocks unexpectedly rose yet again, rising by 0.9 million barrels to 241 million barrels, the highest level since April. It was also the fourth weekly increase in five weeks, a sign that refiners continue to pump out more product than the market is demanding. In fact, refinery runs increased by 1 percent last week from the week before (using a four-week average), about five times higher than analysts had expected.
In other words, refiners are contributing to the drawdown in crude oil stocks, pulling oil out of storage, but they are simply spinning that into gasoline, which then ends up in storage because people are not using as much as the industry thought it would. As summer comes to an end and refiners turn to maintenance and cutback on refining runs, the upward pressure on gasoline inventories could subside, but the demand on crude could also fall.
It isn’t just maintenance season that could push refiners to cut back. The elevated inventory levels and the high rates of refining have shrunk margins. There is little scope to continue at the current rates as refiners earn less. Related: Oil Industry CEO Claims Democrats Have Done More For Oil
“[T]he continued gasoline builds have led some to speculate that this will lead to builds in crude as refineries cut back on production,” wrote Stuart Ive, a client manager at OM Financial. Or, summed up in a more negative light: "The market is technically weak, inventories are still high for summer, maintenance season is not far off and we have floating barrels at sea to top it all," Pete Donovan, a broker at Liquidity Energy, told Reuters.
Consumer demand also tends to dip at the end of summer, and with September now moving to become the front-month contract on offer, negative sentiment is hitting oil prices.
Alarmingly, on the other side of the world China is also dealing with too much gasoline supply. China ratcheted up gasoline production by 8.7 percent in June to a record high. Gasoline exports from China more than doubled in June from a year earlier to about 312,000 barrels per day. This is adding to the glut of refined products in Asia. “Gasoline supply growth is outstripping consumption growth in China, while exports are also growing in the likes of South Korea and Japan,” Peter Lee, an analyst with BMI Research, told Bloomberg. “There’s not only an apparent oversupply of gasoline in China, but also across the whole region as well.” This comes after China flooded the international market with diesel exports earlier this year. Related: Saudi Arabia Offers Hope For An Oil Price Rally
Moreover, across the OECD, inventories are also rising. The IEA said in its July Oil Market Report that the OECD saw commercial inventories rise by 13.5 million barrels in June from the month before, setting a record at 3,074 million barrels.
Adding to the woes for oil prices this week were recent currency movements. On Wednesday the European Central Bank indicated that it would hold off on deeper stimulus. That pushed the euro down and the dollar up, and because oil is priced in dollars, a stronger greenback pushes down crude prices. Japan will decide next week on next steps for monetary stimulus.
The oil market continues its painfully slow march towards balance, but the short-term signals do not look bullish.
(Click to enlarge)
By Nick Cunningham of Oilprice.com
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