Oil stable but careful on how to read stock builds - Rystad Energy comments

Prices can’t be rising forever. Both WTI and Bent have already recovered what levels they realistically could over the last three weeks and have now both stabilized between 30 and 35 USD.

We expect prices to be in this range for a while, without great changes. A marginal rise or drop can be of course expected depending on the day, but we are now at a stage of more stability in the market. Market volatility with huge daily swings would be unexpected and unjustified.

From now on, unless there is a major event that will turn the table in the supply-balance relationship (such as new OPEC decision or more extended cuts, possible new lockdowns that affect demand), we expect prices to stay around the current levels.

Although summer is coming, traders will sweat a bit less than in spring, sitting on more comfortable price levels and with the pace of market changes declining.

The game’s cards are all turned open now, the main obstacles, such as the storage’s capacity wall, are now behind us. What will determine how prices will move from now on is how narrow the supply-demand gap is on the given week, but without an imbalance meaning an immediate danger, like it dd in April.

An indication that stocks are forming is good enough to gently push prices lower.

Ahead of the weekly DOE US inventory numbers due to be published today, most of the market participants expect a moderate build of around 2 to 2.5 million barrels, despite last week’s decreasing levels. Where the stocks level will land of course depends on floating storage utilization and it remains to be seen if producers found more such solutions for the excess oil.

But even if onshore stocks indeed increase, the anticipated build represents a meaningful deceleration compared to April when commercial crude storage was surging at an average rate of 14.6 million barrels per week. Slowing commercial builds is a strong sign that the worst oversupplied situation in history might well be now behind us. However, concentrating only on the positive developments of commercial storage, while ignoring the other types of storage will be at best naïve, and at worst myopic. Rystad Energy anticipates that total US crude storage will increase by nearly 5.6 million barrels during week 20. That includes 2.3 million barrels in commercial onshore storage, 1.8 million barrels in SPR, and 1.5 million bpd in floating storage in the Gulf Coast. This number could we even higher as we do not include potential builds in floating storage in the West Coast.

In the following weeks, we expect that commercial crude builds will be kept in check by fast-dropping domestic oil production. However, we have advised our clients to be careful with the reading of commercial crude stock draws as declines driven by transfers to floating storage/SPR and delays in tankers to unladen, fail to meaningfully change the US oversupply picture.

Read the latest issue of the OGV Energy magazine HERE.