Crude oil prices sold off late yesterday in response to the American Petroleum Institute (API) weekly oil stocks report. Although the API reported an inventories draw of 840,000 barrels, this was less than industry analysts’ expectations. I.e. not so much a bearish figure, rather just a bullish dampener!
In addition, the API reported an unexpected build in gasoline inventories of 1.374 million barrels instead of an anticipated draw for fuel.
Additional pressure on prices arose from further data indicating continuing increases in US oil production in the coming months (which is seen as neutralising the impact from the production cuts implemented by OPEC). This time the data came from the EIA’s Drilling Productivity Report.
Sometimes, what is most interesting or significant concerning price reaction to data releases, is what does not happen rather than what does happen! In my opinion, there were sufficient negative pressure sources yesterday to have really pushed prices down if the overall sentiment was negative, but the reaction is actually surprisingly muted. This suggests to me that there is still a longer term expectation of higher prices and that there is little interest in setting up short positions. For example, an oil producer (like many other businesses) will typically lock in certain price levels with short hedges in order to guarantee their future income by reducing the risk from exposure to price falls before the oil is actually sold. There are still many arguments for a $60+ barrel price later in the year.
Another reason for the muted downside response might be because there has been significant divergence between the weekly crude oil stocks data released by the API on Tuesdays, and the weekly inventories data released by the EIA on Wednesdays. So maybe the markets are on hold, waiting for further confirmation of the current state of crude inventories and gasoline builds from the EIA later today at 10:30am EST. If these also reflect sluggish draws on crude stocks and significant gains in the refined oil products then I guess we will see more weakness in prices.
Here’s an update on the daily chart - we are still struggling with this “magic” band around 52.50 to 52.35:
But I can’t help pondering who is actually really interested in seeing lower prices! Certainly the oil producing nations are not, especially those whose government budgets depend significantly on oil revenues such as the OPEC countries. But surely neither are the oil companies who are producing and refining the oil. For example, the companies in the US shale oil regions have succeeded in reducing their breakeven thresholds via technological improvements, which has driven the current boom production level such as in the Permian basin. But surely they are looking for a healthy pay-back both for themselves and for their investors and are certainly not excited by the prospect of selling their oil at a mere pittance over their beakeven levels?
OK, maybe the non-oil based economies are keen to see cheap energy levels because that releases and diverts individual incomes towards other products and investments and promotes overall economic growth. But there are also limitations to the benefits even there, such as a reluctance to develop alternative energy sources, less incentive towards low-emission transport, reduced govt tax revenues, etc.
Maybe there is an optimum range for oil prices that is acceptable for all interested parties. And although the overall supply/demand ratio is the key factor affecting prices, we could see a balancing mechanism whereby:
under-supply/stronger demand => higher prices => more oil production activated => lower prices
over-supply/weaker demand => lower prices => shutdown in production wells => higher prices
…But as we now focus on the possible shift of the oil glut from basic crude into refined gasoline, it is interesting to look back to an opposite situation not so many years ago…
. The new menu layout looks good to me - even if the commodities section
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