Oil Is Under Pressure As Crude Inventories Rise

Oil Video 10.06.20.

U.S. Crude Oil Inventories Unexpectedly Increase

Yesterday, API Crude Oil Stock Change report showed that oil inventories have unexpectedly increased by 8.4 million barrels.

Today, the EIA Weekly Petroleum Status report confirmed this data. As per EIA, U.S. commercial crude inventories increased by 5.7 million bpd, while gasoline inventories increased by 0.9 million barrels and distillate fuel inventories were up by 1.6 million barrels.

Meanwhile, domestic oil production declined by 100,000 barrels per day (bpd) to 11.1 million bpd. The downside trend in the U.S. oil production continues which is not surprising since the number of rigs drilling for oil keeps decreasing.

According to the latest weekly report from Baker Hughes, the number of U.S. oil rigs declined by 16 to 206.

The EIA report stated that U.S. crude oil imports averaged 6.9 million bpd last week, up by 0.7 million bpd from the previous week. While the increase in imports mostly explains the sudden rise in oil inventories, the strength of demand remains under question.

The inventory data is especially important during the driving season. In case inventories fail to decline in summer, the oil market will have a serious problem.

Economic Forecasts Keep Getting Worse, But Will They Impact Oil Prices?

Economists continue to revise their 2020 economic forecasts to the downside. Recently, OECD (Organization for Economic Cooperation and Development) stated that the world economy will contract by 6.0% in 2020 while the U.S. economy will shrink by 7.3%.

Generally, energy demand is a function of economic growth, so grim forecasts for the economic activity in 2020 can put additional pressure on oil prices.

However, the economic recovery will likely be fragmented and many energy-heavy industries like manufacturing are feeling much better than energy-light industries like services (restaurants, hairdressers, etc.)

In this light, the oil market does not need a universal economic recovery – it needs a recovery in the most energy-heavy industries to get to an acceptable level of oil demand.

In this scenario, oil prices will be supported by both the increased demand and continued production cuts from OPEC+ as well as natural production cuts from the U.S. shale oil companies.

While the recent oil price rally has taken a pause, even the unpleasant inventory data did not lead to a material sell-off. From a big picture point of view, the oil market remains in a bullish mood.

For a look at all of today’s economic events, check out our economic calendar.