1. The oil market’s massive inventory problem
- Oil inventories increased in the second quarter at a rate of nearly 1.8 mb/d, more than four times the ten-year average, according to Standard Chartered.
- Inventories typically increase in the second quarter, but this was the largest build since data collection began in 1956.
- The oil market has technically flipped into a deficit, although at a much lower base. Instead of a 100 mb/d market, supply is right around 88 mb/d and demand at 89 mb/d, rebalancing at a lower level.
- If sustained, the market will draw down on inventories going forward, although the overhang will take around 2 years to drain back to normal levels.
2. Bloated distillate stocks
- Crude stocks rose last week, somewhat deflating the bullish momentum from recent weeks. Distillate stocks continue to climb to unprecedented heights even as gasoline stocks have begun to come down.
- Distillate stocks have surged to their highest level in nearly four decades. “This is a reflection of the ongoing weakness in truck transport and other industrial activities,” Commerzbank wrote in a note.
- Refining margins have fallen dramatically. Squeezed margins are a reflection of rising crude prices but depressed demand for products.
- Bloated distillate inventories could ultimately cut into processing, removing a demand pull on crude stocks.
3. Major capex cuts
- The U.S.…