LONDON, Aug 31 (Portal) – U.S. commercial crude oil inventories have fallen by 34 million barrels since mid-July, adding to a sense of market tightening and leading to a rebound in spot prices and calendar ranges.
Commercial crude oil inventories have declined in five of the last six weeks, according to U.S. Energy Information Administration surveys (“Weekly Petroleum Status Report,” EIA, Aug. 30).
The entire drawdown in total inventories over the same period was driven by commercial crude oil, which has declined by just 19 million barrels since July 14, with products increasing by 12 million and strategic inventories increasing by 3 million.
As a result, commercial crude oil inventories as of August 25 were just +1 million barrels (+0.3% or +0.02 standard deviations) above the seasonal average of the previous decade.
The surplus had narrowed from a recent peak of +22 million barrels (+5% or +0.37 standard deviations) on July 14th.
The latest decline has wiped out an earlier accumulation that had seen the surplus rise since late April.
Chartbook: U.S. Commercial Crude Oil Inventories
As a result, previous month U.S. crude oil futures prices have increased by nearly $7 per barrel (9%) since July 14th and nearly $15 (22%) since the recent low on June 27th.
Hedge funds have anticipated, accelerated and amplified the inventory decline and price rise, increasing their position in U.S. crude oil futures and options to 134 million barrels on August 22, up from just 46 million on June 27.
DAMPING DROPPED
The destocking has particularly depleted inventory at tank farms around Cushing, Oklahoma, the delivery point for the NYMEX US crude oil futures contract.
Cushing crude oil inventories have declined by a total of 9 million barrels (-24%) in five of the last six weeks since July 14.
Cushing inventories were -12 million barrels (-29% or -0.81 standard deviations) below the 10-year average of the previous year as of August 25, after being less than -1 million barrels (-2) on June 30 % or -0.06 standard deviations) were lower.
Due to lower inventories, the three-month calendar spread of U.S. crude oil futures narrowed to a backwardation of $1.14 a barrel on August 25, after a small contango in late June.
The drawdown in U.S. crude inventories coincided with further production cuts by Saudi Arabia and Russia totaling about 75 million barrels in July and August.
Saudi Arabia has also diverted its crude oil exports from the north by raising official selling prices to buyers in the United States significantly higher than to refiners in Asia.
GLOBAL MARKET PROXY
U.S. crude and other petroleum inventories are the most visible part of the global oil market, as they are reported weekly with minimal lag, compared to monthly reports with much longer lags for other countries.
Traders and investors often view changes in U.S. inventories as a proxy for changes in the production-consumption balance at the global level.
The ongoing destocking in the United States is usually interpreted as a sign that the global market is in deficit, leading to an increase in spot prices and spreads.
By the same token, any oil producer, trader or investor looking to initiate a rapid rise in prices and spreads will likely focus on reducing visible inventories in the United States rather than the less visible inventories in Europe and Asia.
US NET RAW IMPORTS
Net imports of crude oil into the US remain subdued despite inventory depletion as exports continue to run relatively quickly while imports remain low.
Based on the average of the month’s preliminary weekly data, net crude oil imports averaged just 2.9 million barrels per day in August.
Net imports were up slightly from 2.7 million barrels per day in the same month in 2022, but fell from 3.2 million barrels per day in 2021 and 4.2 million barrels per day in 2019.
US STRATEGIC PUBLICATIONS
The US Department of Energy released nearly 26 million barrels of crude oil from the Strategic Petroleum Reserve (SPR) in the first six months of 2023 and has released a total of 247 million barrels since the beginning of 2022.
Releases contributed to downward pressure on both spot prices and calendar spreads by increasing the amount of oil readily available to traders and refiners.
The Biden administration directed them to offset any oil shortages and rising price pressures resulting from Russia’s invasion of Ukraine and US and EU sanctions imposed in response.
But the releases were essentially completed by the end of June and the ministry has since added nearly 3 million barrels to the SPR, part of its plan to gradually replenish inventories when prices are relatively low.
The transition from strategic inventory liquidation to accumulation has further tightened the availability of crude oil in the commercial market and increased upward pressure on prices and spreads.
Related columns:
– The oil market will tighten slightly at the end of 2023 (August 17, 2023)
– Crude Oil and Fuels Withdraw Funds as Sentiment Changes (August 7, 2023)
– U.S. oil and gas production begins to level off (August 4, 2023)
– Saudi Arabia Production Cut Eliminates Downside Risk in Oil Market (July 12, 2023)
John Kemp is a market analyst at Portal. The views expressed are his own
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