LONDON (Reuters) - U.S. commercial crude oil inventories have been rising in recent weeks, which some observers have interpreted as evidence the global oil market is adequately supplied and blame for a sudden decline in oil prices.
But this narrative cannot explain the steep backwardation in futures prices for global grades such as Brent, which is usually associated with a market that is significantly under-supplied.
In fact, U.S. commercial inventories have been rising much less than normal for the time of year - even though refiners are undertaking heavy maintenance, which would otherwise have resulted in a larger stock build.
Refiners have been undertaking more maintenance than normal to avoid autumn and winter shutdowns in the run up to the introduction of new IMO marine fuel standards (“U.S. refiners planning major plant overhauls in 2nd quarter”, Reuters, April 19).
The limited increase in U.S. commercial crude stocks despite heavy spring maintenance tends to confirm that the global market has tightened significantly since the start of the year and will tighten even more in the second half.
U.S. commercial crude stocks had increased by almost 30 million barrels by April 26 compared with the end of last year, according to the latest weekly data from the U.S. Energy Information Administration.
The stock build was much larger than the 12 million-barrel increase at the same point in 2018 but well below the 10-year average increase of 45 million barrels and otherwise the smallest seasonal build since 2011.
The United States produced an estimated 211 million barrels of domestic crude oil in the 17 weeks to April 26, which was more than offset by a reduction in net oil imports of 239 million barrels, according to the EIA.
However, U.S. refiners cut their crude consumption by almost 28 million barrels compared with 2018, which more than accounted for the faster rise in stocks compared with last year.
So far this year, U.S. refiners have processed an average of just 16.32 million barrels per day compared with 16.55 million at the same point in 2018, according to EIA data.
Once refiners complete their maintenance and return to full production in preparation for the summer driving season, crude consumption is likely to surge, and stocks will draw down quickly.
Brent futures prices are trading in a backwardation of more than $2.70 per barrel between July and December as traders anticipate a big drawdown in global oil inventories during the second half of the year.
Hedge funds and other money managers have amassed a bullish position in Brent and WTI futures and options contracts equivalent to 723 million barrels by April 23, in the expectation prices will rise further.
Hedge fund long positions outnumbered short ones by a margin of almost 11:1, up from less than 2:1 at the start of the year, according to position reports published by the U.S. Commodity Futures Trading Commission.
Reduced U.S. net oil imports and the limited build up in stocks despite heavy refinery maintenance is consistent with other indicators that the global oil market is under-supplied.
The global market will become very tight later this year unless consumption growth slows or Saudi Arabia boosts output to offset production lost from Venezuela and Iran because of U.S. sanctions.
John Kemp is a Reuters market analyst. The views expressed are his own.
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- Oil prices stumble as hedge funds become overextended (Reuters, April 29)
- Hedge funds bet big on spike in U.S. gasoline prices (Reuters, April 24)
Editing by Elaine Hardcastle
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