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

The oil prices fell in recent weeks, as traders looked past the depletion of global inventories and focused on a future threat that could be posed by the possible slowdown of 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 commercial crude and refined product stocks.

The stocks were 120,000,000 barrels below the seasonal average of the past ten years (-4%, or -7.71 standard deviations), and the deficit was now a whopping 74,000,000 (-4.7% or -5.47 standard deviations), up from the previous 74,000,000 (-3%, or -0.47 standards deviations) by the end March.

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 prices as well as the calendar spread for the next six months both fell slightly in the second quarter but they were still higher than the inflation-adjusted long-term average. This is consistent with an increasingly tightening of the market.

Continued Third Quarter Depletion

The U.S. Commercial Crude inventories have been declining faster and further than normal since the end of the month of June. These are the stocks that are reported the most often and frequently on global markets. This is evidence of an increasingly tightening of the market.

According to EIA Weekly Petroleum Status Report, U.S. crude stocks have declined each week since June's end by 19 million barrels.

As refineries increase their processing in order to satisfy the increased demand for gasoline over summer holidays, U.S. crude oil inventories tend to decline during July and August.

The seasonal depletion in this year's crop was among the highest since 2019 and the most recent decade. This indicates that the global supply continued to be tightened 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 had 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 with 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, as opposed to an average of 6 million barrels over the past decade.

On Aug. 2, regional stocks were 5 million barrels (+1.2%, or 0.17 standard deviations), above the average for the past decade. However, the surplus was down from 18 millions (+8.9% or +0.59 standards deviations) just five weeks earlier.

ECONOMIC OUTLOOK DETERMINATION

Despite the depletion of inventories, hedge funds as well as other money managers are increasingly pessimistic about petroleum prices.

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

At the end June, the combined position was 524 millions barrels (40th per centile), and at the beginning of March it had dropped to 616 million barrels.

Portfolio investors may have reacted badly to OPEC's plans. Unwinding some of the production cuts made by the group since the beginning of the fourth-quarter.

The primary concerns seem to be the declining outlook of the global economy, and the petroleum consumption.

The first quarter's rebound in manufacturing has stalled in the second and the third quarters, according to freight data and purchasing managers surveys.

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 levels since the start the year.

Brent front-month prices averaged $77 a barrel in August. This puts them at the 40th percentile of all the months from the beginning of the millennium, once inflation is taken into account.

Prices and market positions suggest a general economic slowdown, even if it is not a recession. This will dampen petroleum consumption, and stop or reverse the loss of stocks.

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 of shale oil producers in the United States. This will amplify price recovery and OPEC’s ability to undo some production cutbacks – but only if there's no economic slowdown.

Related Columns

Lower prices in the U.S. have curtailed oil and gas production (August 6, 2024).

Investors brace themselves for a global slowdown as oil prices fall (August 5, 2024).

John Kemp works as a financial analyst. These views are solely his. Follow his commentary on X https://twitter.com/JKempEnergy (Editing by David Evans)

(source: Reuters)