Crude Rally Unwinds Completely – Expect $40 Oil

Oil prices plunged on Wednesday as the EIA shocked traders once again, raising the possibility that the oil markets are not as close to “balance” as once thought.

The EIA revealed several worrying signs for the oil markets. First, crude oil inventories actually increased by 1.7 million barrels for the week ending on July 22, the first increase in over two months. Oil stocks rose to 521.1 million barrels. And in another worrying sign for product markets, gasoline inventories also increased for the week, rising by 0.5 million barrels, the fifth increase in the past six weeks. Gasoline inventories are now sitting largely unchanged from March levels, despite hopes and expectations that the summer driving season would cut down on the high levels of supply. Citigroup now estimates that gasoline inventories around the world have topped 500 million barrels.

The figures came as a surprise, with analysts’ expecting a drawdown in crude oil stocks. Judging by the reaction in the markets, oil traders did not like the data. As of midday trading on July 27, WTI dropped more than 2.5 percent and Brent was down more than 3 percent. WTI is now moving close to the $40 per barrel threshold, a level not seen since April.

“The bottom line is the street has gotten it wrong are far as the oil markets achieving supply-demand balance this year,” Tariq Zahir, crude trader and portfolio manager at Tyche Capital Advisors, told Reuters. “We will likely break through the $40 levels in days and weeks to come.”

One intriguing piece of data from the EIA report was the fact that refineries slightly dialed back on processing, with refinery runs falling by 277,000 barrel per day for the week ending on July 22, and utilization rates declining by 0.8 percentage points. This does not come as a surprise. Refining margins have shrunk amid oversupply, hurting downstream earnings. And reports have surfaced that refineries are starting maintenance season early, getting ready for winter fuel blends. A decline in refining will reduce pressure on brimming storage levels for gasoline, helping to ease the glut.Related: Why Saudi Arabia Continues To Pump Crude At Record Levels

One of the largest U.S. refiners is confident that the glut of gasoline stocks won’t be long lasting though. “I don’t think there’s really a concern about being able to clear out the overhang of summer gasoline and moving it into the market,” Valero’s senior vice president of supply and operations Gary Simmons said. Low margins will scare away refiners from overproducing like they did last year, when a large contango encouraged storage.

Not everyone agrees. With record levels of gasoline storage, it will take time for consumers to burn through the inventories. “Coming out of the summer, these tanks will still be full,” Mark Benigno, co-director of energy trading at INTL FCStone Inc., told The Wall Street Journal in an interview.Related: What Will Happen To Turkey’s Energy Security Following The Failed Coup?

At the same time, if refineries do cut back, it would mean that crude stocks might stop declining – and last week’s data showing an uptick in crude inventories is one piece of evidence backing up that trend. The effect on oil prices will likely be mixed and uncertain – improvement on gasoline inventories but bad news for crude demand. Mark Benigno of INTL FCStone Inc. told the WSJ that this dynamic could cause oil prices to fall back to $40 soon.

Following Wednesday’s data release, crude prices are already not far off from that mark, sitting just above $42 per barrel. WTI is down 19 percent since June, closing in on bear market territory, which is generally defined as a 20 percent drop from a recent peak. And as the FT notes, oil traders will watch the 200-day moving averages, technical trading ranges that could spark a stronger sell off if prices drop below the floor.

Source: http://oilprice.com/

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