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Shrunken U.S. oil inventories point to chronic under-supply

U.S. petroleum inventories have continued to slide over the last month and are well below their normal seasonal levels, which has helped push oil prices to their highest since 2014.

The market remains chronically under-supplied with OPEC+ and U.S. shale firms unable or unwilling to meet rapidly recovering demand at prevailing price levels.

Total commercial crude and products inventories have fallen in 56 out of the last 81 weeks according to data from the U.S. Energy Information Administration (“Weekly petroleum status report”, EIA, Jan. 20).

Commercial inventories have declined by a total of 273 million barrels since peaking in July 2020, more than reversing the 204 million increase during the first wave of the pandemic and lockdowns.

Commercial inventories are now 52 million barrels (4%) below the pre-pandemic five-year seasonal average for 2015-2019, the lowest level for the time of year since 2015.

Crude stocks are 17 million barrels (4%) below the average, with stocks around the NYMEX delivery point at Cushing particularly tight at 16 million barrels (33%) under the average.

Distillate stocks are also especially tight at 23 million barrels (15%) below the average and at their lowest seasonal level since 2014. Only gasoline inventories appear normal and almost exactly in line with the average.

The scarcity of crude and distillates has pushed front-month Brent and WTI futures prices to their highest since October 2014, as traders anticipate supplies will tighten even further in the course of 2022.

Chronic under-supply and the low and falling level of inventories are manifest in large backwardations occurring in both futures contracts.

Brent’s six-month calendar spread is trading in a backwardation of $4.80 per barrel (in the 98th percentile for all trading days since 1990) while WTI is trading in a backwardation of almost $5.50 (97th percentile).

Reflecting this, hedge funds and other money managers had accumulated lopsided bullish positions in both WTI (77th percentile) and middle distillates (83rd percentile) by Jan. 11.

In recent months, OPEC+ has expressed concerns about the Omicron variant of coronavirus dampening oil consumption, while U.S. shale producers have focused on the risk of over-producing.

In fact, the market has remained under-supplied almost continuously for 18 months, with the result that conditions are now among the tightest for a quarter of a century.

The persistent shortage of petroleum production is real.
Source: Reuters (Editing by David Evans)

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