Oil Inventories Getting Full

In this post, we highlight Chevron (CVX - Analyst Report) and BP (BP - Snapshot Report).

Bulging Inventories Weigh on Oil Prices

In its weekly status report, the Energy Information Administration (EIA) reported today another substantial crude oil inventory build for the week ended February 6, highlighting the continued mismatch between supplies and anemic demand. The 4-week average of total refined products supplied, a proxy for petroleum demand, was down 1.3% from the year-earlier level.

The agency reported that total commercial crude oil stocks increased by 4.7 million barrels from the preceding week, significantly above expectations. Current stocks are 16.5% above the comparable period last year. The supply cover continues inching up, with current stock levels sufficient for 24.7 days of supply, significantly above the year-earlier level of 20.6 days.



The above chart from the EIA clearly shows that currently inventory levels are significantly above the five-year range (the shaded portion). Compared to this time last year, the drop in imports is more than made up by reduced refinery inputs and increased domestic production. Domestic production being up is not a typo, that’s how it is. In fact, this year is expected to be the first since 1991 for positive year-over-year production growth in the U.S. The primary drivers of this year’s growth are the start-up of two offshore Gulf of Mexico projects by Chevron (CVX - Analyst Report) and BP (BP - Snapshot Report).

At the critical Cushing, Oklahoma delivery point -- the official delivery point for the NYMEX futures contract -- crude oil stocks are more than 102% above the year-earlier level, an all-time high. With the 600,000 barrels build at Cushing during the week, capacity at this crucial delivery point is almost full, which is expected to continue weighing on prices in the coming days. The heavy supply overhang at Cushing is a major contributing factor to the current discount at which the benchmark U.S crude, West Texas Intermediate (WTI), is trading relative to Brent, the European benchmark crude. Typically, WTI trades at a premium to Brent.

Given the anemic demand and continued supply overhang, we would not be surprised with a renewed downward push in oil prices in the coming days. However, we do not think that prices can stay in that range for any great length of time. The inventory situation is expected to improve as OPEC’s supply cuts take effect, most likely in the spring months, and visibility on the U.S. economy improves following the expected enactment and implementation of the new stimulus program.

Read the full analyst report on CVX

Read the full analyst report on BP