Commodities Market Strategy Oil

Macro flash: US Crude oil inventories at record level

US Crude oil inventories stood around 80 million barrels above their average level for the same week over the 2015-2019 period.

The US oil market accounts for around 20% of global oil demand and serves as a bellwether for oil prices, all other things being equal. In this regard, the US Energy Information Administration (EIA) report for the week ending July 3 showstentative signs of recovery in the US oil demand. US Refineries operated at 77.5% of their operable capacity. Gasoline production increased last week, averaging 9.0 million barrels per day. Distillate fuel production also increased, averaging 4.8 million barrels per day. Perhaps even more importantly, U.S. crude oil imports averaged 7.4 million barrels per day last week, increasing by 1.4 million barrels per day from the previous week and returning to the same level as one year ago. 

But the Chart displayed above shows the long way oil demand still has to go to rebalance the oil market. Our calculations based on the data provided by the US EIA show that on the week ending on July 3, US Crude oil inventories stood around 80 million barrels above their average level for the same week over the 2015-2019 period.

The easing of lockdowns has already given a boost to petroleum demand in some US states and abroad, especially in some European countries like France and Germany. This comes atop a stronger demand recovery in 2Q2020 in China, where travel restrictions have been eased three months ago. Global oil demand will keep recovering over the second half of the year, provided no new generalised lockdowns are imposed. In its June Oil reportthe International Energy Organization (IEA) predicted that Oil demand would fall by 8.1 mb/d in 2020, before recovering by 5.7 mb/d in 2021, to reach 97.4 mb/d. This would be still 2.4 mb/d below the 2019 level. As per the IEA, “this 2.4 mb/d gap between 2021 and 2019 is largely explained by the dire situation of the aviation sector.” Indeed data from IATA shows that passenger air traffic could be slashed by more than half in 2020 relatively to 2019. By all accounts, the recovery in air transportation will be very gradual in 2021. 

Oil supply by OPEC+ declined 9.4 mb/d from May following the agreement reached in April with the supply reduction extended till the end of July before a gradual tapering takes place. Output from other countries has fallen by an additional 4.5 mb/d since the start of the year. According to the IEA, “After tumbling by 7.2 mb/d in 2020, global oil output is set for a modest 1.7 mb/d recovery in 2021.” As Edward Bell, a senior commodities analyst at Emirates NBD Bank wrote in a recent research note, “the supply side will play less of a role in determining the trajectory for oil as the major adjustments from OPEC+ and other producers have already been made. OPEC+ countries will actually begin to taper their production cuts from August onward.”. From now on, oil prices are more likely to be driven by the evolution of demand than by abrupt policy decisions and theatrical turnarounds orchestrated by OPEC+ countries, as we have witnessed in 1H 2020.  

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