Bullish report on oil stocks tempered by inflation fears

June 17, 2021

Photo of the Port of Houston

Normally, the bullish US Equity Stocks report, which shows a whopping 7.4 million barrels of crude drawdown and a 1.3% increase in refinery cycles, should normally be a good enough signal. bullish to proverbially send oil prices to the moon.

Louise dickson

The sharp 1.3% increase in utilization put the United States on track to regain pre-pandemic levels and could be linked to some major refineries restarting in the past month and reaching utilization. higher.

Accumulating gasoline inventories to a hefty 2 million barrels is not uncommon during the summer months, as US refineries typically increase their cycles before the driving season.

But yesterday’s EIA stock report was not enough to offset fears of transient inflation in the United States in particular.

The drop in Brent to $ 74 a barrel instead of maintaining its boom at $ 75 a barrel is mainly a reflection of the perceived fear of inflation, both in the real economy and in commodity prices.

The dominant economic argument is whether there is too much slack in the U.S. economy and whether the Fed needs to better control liquidity and – in order to avoid negative interest rates – get out of the mop to clean it up. excess liquidity.

Unlike the financial crisis of 2007-2008, where currency injections and bailouts were an obvious response to an economy clearly in recession, the post-Covid-19 era is a more delicate and nuanced monetary puzzle.

Suppressed demand and a growing pool of stimulus injections could potentially push demand beyond supply capacity.

Much of consumer demand and oil consumption has been temporarily interrupted by the pandemic – and the subsequent reduction in the supply of goods, especially those made from raw materials, is finally catching up. delay as normal economic activity looms on the horizon.

However, we still don’t know how ‘normal’ the new economic normal will be – pent-up demand may be exaggerated, as many have lost their jobs and may be reluctant to invest.

The pandemic pause in the production of goods is now causing visible inflation in everything from building materials to new cars and raw materials.

Oil prices are not fully shielded from inflation, and $ 75 a barrel of oil is certainly well above marginal supply cost, so the concern about inflation is valid.

The recent big gains in commodities have of course fueled investor nervousness over rapidly rising inflation – Brent has jumped 45% since December 2020.

But while part of that can be attributed to vaccine optimism, a weaker dollar, US stimulus packages, US infrastructure programs and other drivers of inflation, the crux of the matter is Pressure on prices remains the perceived fear of an acute supply deficit, as OPEC + has not yet provided sufficient supply. back in the market, and US oil production has so far been unresponsive to oil prices over $ 70.

Louise Dickson is an oil market analyst for Rystad Energy.

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Felix J. Dixon