United States crude oil inventories rose by the most on record last week. So why is the crude oil market rallying today, and is it sustainable?
The Energy Information Agency (EIA) reported today that last week U.S. crude oil inventories rose by a record 15.2 million barrels compared to an expectation of 11.9. Much of this was attributed to U.S. oil production declining by 600,000 barrels per day last week to 12.4 million per day. Also, refinery run rates fell 6.7% to 75.6% of utilization. Gasoline stocks rose by 10.5 million barrels and distillate inventories rose by 0.5 million barrels.
Despite the enormous build in crude oil stocks, WTI is currently trading higher by $0.70 to $24.33/barrel. Why is that? Much of this is due to a lot of negative news being built into the price already, and optimism about the OPEC video conference call scheduled for tomorrow to discuss production cuts. This would normally be a good sign for the bulls, but here is the conundrum, we are not living in a normal world at the moment. Approximately 97% of the U.S. is on a stay at home order which greatly reduces fuel demand. The EIA reported that overall U.S. fuel demand has dropped by 33% in the last 3 weeks. The entire country of India, with a population of over 1.3 billion people, is on lockdown and its civilians are asking for an extension of the lockdown. Many analysts are commenting that world oil demand is down 30-35 million barrels per day. There have been estimates that OPEC+ is talking about cutting 10 million barrels per day. In a world where we still have no end date on the stay at home orders, does this production cut really matter? It all depends on when people can begin driving again. If it’s in the next few weeks, the move higher in oil prices now might be warranted. If we are advised to stay home until sometime in the summer, traders will have difficulty storing all this excess crude supply and we could have a real storage problem on our hands and crude prices could plummet even further. We don’t like uncertainty, but unfortunately we won’t have a grasp on how long low oil prices will persist until we get clear direction from the government on when we can start driving again.