Crude oil prices lost just under 20% of their value in the last month and the single biggest force acting on them have been stocks, particularly US gasoline stocks, 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 towards balance looks slow and uncertain and that makes the ride ahead a rocky one with volatility being the only constant.
Though US gasoline demand has been relatively strong—implied gasoline demand according to the Energy Information Administration averaged 9.752 million barrels per day (b/d) over the first four weeks of July versus 9.506 million b/d same time last year—this clearly has not been enough.
US gasoline stocks totalled 241.5 million barrels in the week that ended 22 July, an 11.6% surplus to the five-year average for the same time of the year, and with only four weeks to go from the unofficial end of the driving season, the surplus stocks will likely continue.
One possible explanation for the resilience in stocks could be that other proxies for US gasoline consumption have painted a less sanguine picture. For example, US government data shows the number of miles driven by American motorists has slowed recently on a year-on-year basis.
Another reason for solid gasoline inventories have been imp-orts, which paradoxically have been running high with Europe too sitting on ample stocks.
The inability of summer driving to lower product stocks has hurt refining margins. In July this year, the RBOB crack against ICE Brent averaged $11.89/barrel and the ULSD crack averaged $13.04/barrel compared with $22.29/barrel and $14.29/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 stocks, but will also translate into less crude demand.
Front-month ICE Brent crude futures closed at $42.14/barrel on 1 August, down 17% from $50.89/barrel on 1 July, and front-month NYMEX WTI settled at $40.06/barrel on 1 August, down 19% from $49.65/barrel on 1 July.
The International Energy Agency (IEA) 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 stocks remained a risk to price stability.
“Although stocks 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 said. “Unless demand turns out to be stronger than we currently anticipate, products stocks could rise still further and threaten the whole price structure,” the IEA added.
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 past five weeks. It dropped as low as 316 rigs in the week that ended 27 May, but rose to 374 as of the week ended 29 July.
Meanwhile, Opec crude output 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 stocks and supply, this is hardly reason to be bullish about oil prices.
On 31 July, 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 the 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 & Middle East Oil News & Analysis, S&P Global Platts.