US oil demand could drive crude inventories to historic lows

Through Sheela Tobben and Lucia Kassaï to 06/24/2021

Cushing, crude terminal OK

(Bloomberg) – Crude oil inventories at America’s largest storage facility could drop to historically low levels by the end of September as the rebound in demand continues to outpace production.

Inventories at Cushing, Oklahoma, the delivery point for West Texas Intermediate oil futures have fallen nearly 4 million barrels in the past two weeks, bringing inventories to the lowest since March 2020, when the pandemic forced the country to close. Analysts and traders are betting supplies could drop to seasonal levels not seen since 2018 by the end of September.

Inventory levels at the huge complex, home to crude oil produced in West Texas, the Midwest and Western Canada, arguably have more influence on oil prices than anywhere else in the world. . While shale production in the United States is still 15% below its pre-pandemic peak and imports from Canada are low, executives of trading houses and major oil companies agree to more and more believe that prices should rise as supplies tighten.

Cushing’s inventories, currently 41.7 million barrels, could drop to their lowest in nearly 3 years as refineries ramp up fuel manufacturing and oil production still lags behind, said Chris Sloan, Houston-based analyst at BB Energy Trading Ltd. Inventories could drop to 30 million barrels over the next three months, he said.

This is a sharp reversal from a year ago, when a collapse in market prices devastated the oil industry as demand slipped from restrictions fueled by the pandemic. This has forced traders to stockpile junk crude around the world until consumption improves, moving the market into a steep contango where oil for immediate delivery trades below the price of supply. in the long term.

At the heart of the downturn is the lack of a type of oil called Domestic Sweet or DSW that is produced by blending a cocktail of crudes, including Permian and Midwestern supplies, according to market participants. The recovery in production in the Midwest, where the Cushing reservoirs are located, was the slowest of any producing region.

“The lack of available DSWs is definitely tightening WTI-spec balances at the hub level,” according to a note by consultants Energy Aspects. That and strong outflows could push Cushing’s inventories in August and September to around 27 million barrels and 24 million barrels, respectively, they said.

Three basins that may contribute to the DSW mix stock tightening are Niobrara, Eagle Ford and Bakken, said Elisabeth Murphy, ESAI Energy LLC upstream analyst for North America. “Our forecasts indicate an annual decline of about 90,000 barrels per day for Bakken, about 130,000 barrels per day for Eagle Ford and about 120,000 barrels per day for Niobrara this year,” she added. .

Oil production in the United States as a percentage of pre-pandemic levels

Region

% of pre-pandemic levels

Midwest

73%

Gulf Coast

92%

East Coast

101%

Rocky mountains

78%

Western coast

91%

Source: EIA data

The strong shift in the oil market is also leading to a drop in stocks. When barrels for quick delivery fetch much higher prices than those listed for future delivery, traders and producers are motivated to sell the product.

“I think Cushing’s inventories will drop to minimum operating levels of 32 million to 34 million by the end of July,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston.

Still, some traders note that the rise in prices of WTI relative to Brent has held back exports. They also note that high prices and high inventories of gasoline and diesel will reduce domestic demand. Last week, crude processing rates at U.S. refineries fell for the first time since early May, government data showed.


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Felix J. Dixon