Kemp: Oil traders focus on economy, not dwindling stock.

The oil prices have fallen in recent weeks, as traders focus their attention on a potential slowdown of the major economies.

At the end of the month of June, the Organization for Economic Cooperation and Development's (OECD) advanced economies had 2,761,000,000 barrels of crude and refined product in their commercial stocks.

The stocks were 120 million barrels below the seasonal average of the past ten years (-4%, or -7.71 standard deviations), and the deficit was now 74 million barrels higher than the previous end-of-March (-3%, or -4.47 standard deviations).

According to the Short-Term Energy Outlook, prepared by the U.S. Energy Information Administration(EIA), the deficit has been the largest for nearly two years.

The front-month Brent futures price and the six-month spread have both declined slightly in the second quarter but are still above the long term inflation adjusted average. This is consistent with an increasingly tightening market.

Continued Third Quarter Depletion

Since the end June, U.S. Commercial Crude inventories have continued to fall faster and further than usual. This is evidence of a tightening of the market.

According to the EIA Weekly Petroleum Status Report, U.S. crude stocks have declined each of the last five weeks by 19 million barrels.

As refineries increase their processing to meet the increased demand for gasoline over the summer holiday period, U.S. crude inventory typically decreases in July and August.

The seasonal depletion in this year's crop was the highest since 2019 and one of the largest over the past decade. This indicates that global supplies continued to tighten up at the beginning of the third quarter.

The U.S. crude inventory was 11 million barrels below the 10-year average (-3%, or -2.23 standard deviations), on August 2, and the deficit has increased from 4 million barrels at the end June (-1%, or -0.08 standards deviations).

Chartbook of global oil inventories, prices and stocks

The most significant depletion was at the refineries and tanks in Texas and Louisiana, along the Gulf of Mexico. These are the markets that are the closest to global oil markets.

The Gulf Coast's crude inventories have declined by 19 million barrels in the last five weeks, compared to an average of 6 million barrels over the past decade.

On Aug. 2, regional stocks were still 5,000,000 barrels (+2%, or +0.17 standard errors) above the average for the past decade. However, the surplus was down from 18,000,000 (+8% or +0.59 standards deviations) just five weeks earlier.

DETERMINING ECONOMIC OUTLOOK

Despite the depletion of inventories, hedge funds and money managers are increasingly pessimistic about the future petroleum prices.

On July 30, fund managers reduced their combined positions in six of the most important futures and option contracts for petroleum to just 262 millions barrels (the 4th percentile since 2013).

At the end June, the combined position was 524 million barrels. This is the 40th percentile. By the end March, it had dropped to 616 million barrels.

Portfolio investors may have reacted negatively towards OPEC's plans. Unwinding some of OPEC's production reductions from the beginning of the fourth quarter.

The primary concern is the declining outlook for the world economy and the petroleum consumption.

The first-quarter manufacturing rebound has slowed down in the second and the third quarters, according to Purchasing Managers Surveys and Freight Data.

Concerns about the future have increased since mid-July, and in particular the beginning of August. This has caused oil prices to plummet to their lowest level since early this year.

Brent front-month prices averaged $77 a barrel in August. This puts them at the 40th percentile of all months since the turn to the century.

Prices and positions at present are consistent with an economic slowdown, a mid cycle slowdown, if not full-blown recession. This will dampen petroleum consumption, and stop or reverse the depletion in inventories.

Fund managers will be able to accelerate and amplify the price rise if the expected slowdown does not materialise.

Prices are falling, which is already reducing the output growth of U.S. shale oil producers. This will amplify price recovery and OPEC’s ability to unwind production cuts – but only if there is no economic slowdown.

Related columns: U.S. oil production curbed due to lower prices (6 August 2024); Oil prices fall as investors prepare for global slowdown (5 August 2024);

John Kemp is an analyst of the market. His views are his. Follow his commentary on X https://twitter.com/JKempEnergy (Editing by David Evans)

(source: Reuters)