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Analytics, 19 May 2021

How oil prices reacted to first oil inventory data

Oil prices extended losses after an increase in U.S. crude inventories added to inflation and concerns that resolution of the Iranian nuclear deal could result in more Iranian oil barrels hitting the market. While crude oil inventories fell this week, U.S. oil production was up 100,000 bpd at 11 million bpd on average for the week ending May 7, according to the latest data from the Energy Information Administration.

Oil Inventory

The American Petroleum Institute reported late Tuesday that U.S. crude supplies inched up by 620,000 barrels for the week ended May 14. Analysts had predicted a build of 1.680 million barrels for the week.

In the previous week, the API reported a massive draw in oil inventories of 2.533 million barrels after analysts had predicted a draw of 2.817 million barrels. Since the start of 2020, crude oil inventories have grown by more than 50 million barrels, according to API data. The data, however, also reportedly showed gasoline stockpiles down by 2.8 million barrels, while distillate inventories fell 2.6 million barrels. Crude stocks at the Cushing, Okla., storage hub, meanwhile, edged up by just 53,000 barrels for the week, sources said.

This week’s Energy Information Administration report provides the first look at the impact of Colonial Pipeline’s system outage, which had spurred panic-buying and supply disruptions across much of the U.S. Southeast and East Coast last week. U.S. Gulf Coast fuel inventories jumped by the most on record with the pipeline down.

How Oil prices moved

Oil prices were trading down on the day before the data release as the market was jittery on suggestions that “important news” would be released on Wednesday regarding the Iranian nuclear deal, the resolution of which could result in more Iranian oil barrels hitting the market. A clarification was later made by Mikhail Ulyanov, Russia’s envoy to the JCPOA talks, saying that it was still “too early for a breakthrough”. But even the notion that more Iranian oil could hit the markets was enough to send oil prices crashing.

Futures in New York tumbled as much as 5.2% on Wednesday. West Texas Intermediate crude futures for June delivery was at $65.30 barrel in electronic trading, compared with Tuesday’s settlement at $65.49 on the New York Mercantile Exchange. Brent for July settlement slid $2.50 to $66.21 a barrel on the London-based ICE Futures Europe exchange.

Oil Price Outlook

Lockdowns around the world, especially in major economies have added complexity to the oil price mix. India, the world’s third-largest oil importer, is the latest coronavirus hotspot —a statistic that dented oil demand and pressured oil prices. Europe renewed many of its lockdown restrictions, delaying the oil price recovery. But now, as India is amid its worst COVID-19 surge since the pandemic began, Europe is getting ready to lift those lockdowns. EU officials have submitted this week a proposal to ease summer travel restrictions to its 27 nations. This will increase the demand for jet fuel—a critical component of crude demand.

OPEC+, out of its necessity, has intervened in the oil market on the supply side of the equation to offset the pandemic-depressed oil demand. And despite the group’s relative success at curbing oil production to prevent excess oil inventories from ballooning before the market fully recovers, India’s booming case counts have prevented oil prices from a quicker recovery. This has put even more pressure on OPEC+ to perform to meet market expectations. But there is no doubt a shift in the momentum of the oil markets. Indeed, oil prices have recovered somewhat in recent months, and the overwhelming majority of oil experts and analysts think this trend will continue.

On the positive side, in the United States, Covid-19 cases are shrinking while the number of vaccinated grows. Most states in the US have relaxed restrictions, following new CDC guidance that those fully vaccinated can now go without masks.

Analysts at Goldman Sachs estimate that oil will reach as much as $80 this summer. The Bank notes that there is a coming change in the volume of demand which supply will not much. Analysts at Rystad noted that oil demand should still increase by 3 million bpd between now and the end of June, India troubles or no. According to her, oil prices should make their way back to $70 per barrel in the coming months.

Moody’s has a rather positive view of the timing of an oil price rebound as well, citing pent-up consumer demand that will propel forward a global economic recovery. But their medium-term price range is still capped at $65 per barrel. Moody’s sees this economic recovery as hastening a rebound in oil demand through the end of this year and the beginning of next year.

The outlook may be uncertain, but the current trend is one of drawing down oil stocks—a sign of increased oil demand while OPEC+ continues to restrict output.

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