High crude oil stockpiles bring volatility and uncertainty
United States stockpiles of petrol remain unusually high with only four weeks remaining during the summer driving season
Crude oil prices lost just under 20 per cent of their value in the last month and the single biggest force acting on them has been stockpiles, particularly US petrol inventories, which have proven to be very resilient.
Fundamentally there is little doubt that the market is balancing. But the pace at which supply and demand move toward balance looks slow and uncertain and that makes the ride ahead a rocky one with volatility being the only constant.
One possible explanation for the resilience in stockpiles could be that other proxies for US gasoline consumption have painted a less sanguine picture
Although US petrol demand has been relatively strong -- implied petrol demand according to the Energy Information Administration averaged 9.752 million barrels per day over the first four weeks of July versus 9.506 million b/d at the same time last year -- this clearly has not been enough.
United State petrol stockpiles totaled 241.5 million barrels in the week that ended July 22, a 11.6 per cent surplus to the five-year average for the same time of year, and with only four weeks to go from the unofficial end of the driving season, the surplus stockpiles will likely continue.
One possible explanation for the resilience in stockpiles could be that other proxies for US petrol consumption have painted a less sanguine picture. For example, US government data shows the number of miles driven by US motorists has slowed recently on a year-on-year basis.
Another reason for solid petrol inventories has been imports, which paradoxically have been running high with Europe too sitting on ample stockpiles.
The inability for summer driving to lower product stockpiles has hurt refining margins. In July this year, the RBOB crack against ICE Brent averaged US$11.89 per barrel and the ULSD crack averaged US$13.04 per barrel compared with US$22.29 per barrel and US$14.29 per barrel respectively in July 2015.
This is causing some refiners to cut runs. A slowdown in refinery activity -- whether caused by maintenance or economic run cuts - should help tighten product stockpiles, but will also translate into less crude demand.
Front-month ICE Brent crude futures closed at US$42.14 per barrel on August 1, down 17 per cent from US$50.89 per barrel on July 1, and front-month NYMEX WTI settled at US$40.06 per barrel on August 1, down 19 per cent from US$49.65 per barrel on July 1.
The International Energy Agency in its July monthly oil report said that global oil market readjustment remains on track after showing an “extraordinary transformation” from a major surplus in the first quarter to close to balance in the second quarter, but also warned that high stockpiles remained a risk to price stability.
“Although stockpiles are close to topping out, they are at such elevated levels, especially for products for which demand growth is slackening, that they remain a major dampener on oil prices,” the IEA added.
“Unless demand turns out to be stronger than we currently anticipate, products stockpiles could rise still further and threaten the whole price structure,” the IEA said.
Signs of increased drilling activity in the US and strong OPEC production have also had a bearish impact on prices.
The US oil rig count has increased for the last five weeks. It dropped as low as 316 rigs in the week that ended May 27, but rose to 374 as of the week ended July 29.
OPEC crude output meanwhile surged 300,000 b/d to close to an eight-year high of 32.73 million b/d in June with steady increases for Saudi Arabia and Iran, an S&P Global Platts survey showed.
Saudi Arabia increased its output further to produce an average 10.33 million b/d in June in order to meet domestic demand. Last summer, Saudi Arabia produced as much as 10.45 million b/d. Iranian output in June climbed to 3.63 million b/d, its highest since June 2011, and very close to pre-sanctions levels.
Uncertainty continues to surround Libyan and Nigerian oil production, but with ample stockpiles and supply, this is hardly reason to be bullish about oil prices.
On July 31, Libya’s state-owned National Oil Corp welcomed an announcement by the UN-backed government of the reopening of the 340,000 b/d Es-Sider, 220,000 b/d Ras Lanuf, and 75,000 b/d Zueitina oil facilities, after reaching a deal with Petroleum Facilities Guards who control the ports.
But this is unlikely to immediately boost crude output as production remains dependent on matters ranging from technical issues in oil fields, the state of the closed oil terminals, and the politics surrounding the web of factions operating in the country.
The country’s oil production was 310,000 b/d in June, according to S&P Global Platts data.
In Nigeria, the government has said that by August oil production will recover to its pre-January levels of around 2.2 million b/d, from 1.9 million b/d now, after it plummeted to 1.4 million b/d in May.
But negotiations with the militants have so far yielded little in the way of positive results and some oil companies and analysts said time is running out for the government to stem the wave of disruptions to their operations.
Mriganka Jaipuriyar is associate editorial director, Asia and Middle East oil news and analysis, at S&P Global Platts
