Could the Bottom Fall out of this Oil Rally?

Was it all a mirage?

By Nick Cunningham,

The oil markets will have to wait almost two more months before the uncertainty surrounding the pending OPEC deal is settled, so in the meantime a renewed focus on the fundamentals is in order.

The global oil production picture is still highly fluid, particularly with promises for a cut to OPEC production while some OPEC members (Nigeria, Libya, Iran) could actually ramp up output. But while output figures are more difficult to pin down, data on inventories is much clearer – and it still doesn’t look good for oil bulls.

As for crude oil inventories, they remain at extraordinary heights, despite having come down more recently. In the U.S., refineries are well into maintenance season, leading to a drop off in demand in September. Crude stocks are declining, but still remain high. For the week ending on September 23, U.S. oil inventories sat at 502.7 million barrels, which is up from 457.9 million barrels a year earlier. Softer demand from sidelined refineries could slow the drawdowns, leaving the U.S. very well supplied in the months ahead.

The landscape for refined products looks no better than crude oil. Inventories are extremely elevated, despite reasonably strong demand. In Europe, gasoline stocks in the Amsterdam-Rotterdam-Antwerp are more than a third higher than the five-year average. In the U.S., gasoline stocks have come down from their record highs seen earlier this year, but are still above the five-year average for this time of year. With summer driving season over, the sharpest drawdowns could also be behind us. For the week ending on September 23, gasoline inventories actually climbed by 2 million barrels, leaving them 6 percent higher than they were a year ago.

This comes despite strong demand from American motorists. Gasoline demand is up more than 4.5 percent from 2015 levels. But the buildup in products is just too high. “This year it is a big disappointment for gasoline — demand is there, but stocks are just too high,” a gasoline trading source told S&P Global Platts. The gasoline market has become “difficult to follow,” the source added, as activity over the summer defied expectations.

On the refined products front, maintenance season is actually a positive thing. Fewer refineries churning out product means that margins will improve and stocks could come down. The flip side of that coin is weaker crude oil demand.

All in all, the elevated levels of oil and refined products sitting in storage will probably keep a lid on crude oil prices through the rest of this year and much of 2017.

The IEA predicts that inventories won’t substantially come down until sometime next year. In its September Oil Market Report, the IEA revealed that total stocks of petroleum products in the OECD “smashed through the 3.1 billion barrel wall.”

The IEA warned about slowing demand, particularly in China, which could extend the oil price slump. In fact, China remains a very large question mark. The IEA said that China’s oil demand was “wobbling,” and indeed demand has slowed markedly as of late, hitting 10-month lows in July. But there is debate about what to expect next from China.

On the one hand, S&P Global Platts sees “brighter” days ahead for Chinese demand, which recovered by about 2 percent in August. “Demand in September and October will be better as harvest activity and the fishing season will increase demand for gasoil. The week-long National Day holiday in October will also stimulate gasoline demand as more traveling is expected,” a refiner from Shandong said in an interview with S&P Global Platts.

On the other hand, China’s oil demand could drop off if it slows imports after filling up a big chunk of its strategic petroleum reserve. Oil demand was elevated earlier this year in part because of the rush to buy cheap oil and stockpile it into its strategic reserve. But with many storage tanks filling up, China might not need as much oil. JP Morgan predicts that Chinese oil demand could fall by about 15 percent.

Taken altogether, the oil market looks much the same as it did throughout 2016. Supply is still exceeding demand, inventories are still at exceptionally high levels, and demand is growing, but not fast enough to fix the imbalances. OPEC’s deal might have changed market sentiment, but the fundamentals do not look all that different than they did a few months ago. By Nick Cunningham,

Teetering on the brink of utter economic collapse, Venezuela gets creative. Read…  As Default Looms, Venezuela Pushes Highly Dubious Oil Deals

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  20 comments for “Could the Bottom Fall out of this Oil Rally?

  1. CrazyCooter says:

    When you say …

    This comes despite strong demand from American motorists. Gasoline demand is up more than 4.5 percent from 2015 levels.

    … I am curious as to your source. Pretty generic statement – is that an increase month to month, year over year, or something else?

    Then you say ….

    The flip side of that coin is weaker crude oil demand.

    …. so help me figure this out. Refiners aren’t demanding more oil, but they have near record or record inventories, but Americans love driving more than last year?


    Then you conclude …

    Supply is still exceeding demand, inventories are still at exceptionally high levels, and demand is growing, but not fast enough to fix the imbalances.

    … and this is the second to last sentence, yet seems skewed from the other comments. Not that I disagree with the second to last sentence – I just couldn’t connect the dots on the way there.

    More charts and sources!

    In an effort to parse this and not look like a fool, I really did try to source gasoline demand.

    I found this, but it seemed a year behind (last chart) …

    … then I found commentary on the same, but still a year behind …

    RR concludes this data point may net out exports/imports, which makes the “American driver” a bit misleading, but to be fair, due to exports, demand is up!

    Also of note on the demand side, ZH reported recently about the actual size of Chinese strategic reserves, since they have been a bid under oil prices for quite some time (while they stock pile).

    Once they are topped off and leave the filling station – going to be interesting given the global recession that seems to already arrived (and yet to be officially recognized) …



    • Wolf Richter says:

      Concerning your question about gasoline demand:

      Doug Short, a contributor here, tracks many things with great charts, and gasoline demand is one of them.

      Gasoline demand has been rising sharply over the past few years – as have sales of SUVs and pickups. (but it’s still down from the levels before the Financial Crisis).

      Here’s the article, including the link to the EIA:

      And here’s one of the charts in the article. Click on the chart to enlarge:


    • Petunia says:

      I moved to fly over country and the traffic here is worse than the Long Island Expressway(known locally as the longest parking lot in the world). In the last month it is even worse than before. People are definitely out and about, me included. So yes, people are buying more gas.

      • CrazyCooter says:

        I see (and hear) a growing homeless problem – so it is the cynic in me. And I don’t think the macro is as good – so stats are great, but I need the macro picture to digest. When I see a stat here, a stat there, and then a conclusion – it just sends up my hackles – mas charts, mas data, mas sources – let me decide.

        WS tends to be pretty good in that regard – the narrative is second to the data – perhaps others disagree. This article felt the other way round – so I posted along those lines (and, albeit, a few beers in).

        My personal opinion, and I do try to stay informed, is that the global macro demand picture is cratering – there are a lot of economic issues that were never fixed, they were papered over, and the next adjustment is shaping up to be very brutal.

        I live in Alaska – and the state budget is blow to bits – I go down with this ship if I don’t want to move – and trust me I don’t – so I try to figure the facts and truth as much as possible.

        My current thesis is global production has grossly outpaced supply and demand is not holding up well – so maybe oil trades up, maybe it trades down – I don’t care, I don’t trade, but if it doesn’t normalize at 60 to 70 a barrel, over a period of the next few years – I am looking at serious hard times.

        I think this might be the motivator for the war drums in MENA – it is looking a bit scary lately.



        • Petunia says:

          War is the best way to support the oil price, and they also need a good believable conflict to reset the economy. Having said that, I always knew the lower oil price was an election gimmick. The day after the election things will go back to normal, meaning bad. I guess you’ll be voting for the war monger.

  2. night-train says:

    OPEC members cheat. In the 80’s the Saudis had to drive the price down to $10/bbl to get the cartel members on the same page. OPEC members will continue to cheat on production quotas. I expect some price volatility, but no firm price floor over $50/bbl. So, if you plan to go to North Dakota for one of those six-figure trucking or rig hand jobs, it’s probably a good idea to wait a while.

    As a side note, I noticed last week that natural gas was at $3/mcf. Which is where it was when I started my career in the late 1970s.

    • Steve Carter says:

      You are exactly right about Natural Gas. In 1984 I sold it for 3.40 just before decontrol and 1.25 after decontrol in 1987.
      Best price for oil was 28.00/bbl during first gulf war and government got all of the profit in taxes.

  3. Patrick says:

    WTi touched $49 yesterday so traders are looking to take that out once the dollar gets out of the way. BTW oil remained up most of today, even with an 0.5% increase in the dollar and gold waay down, so that should tell anyone how much it ‘want’s to go up vs down. Once it hits $49 handle, $50 is all but inevitable; but where it goes from there is anyone’s guess. Markets have the memory of a goldfish so my hunch is that it touches $51 but taps out & heads lower. After all the only oil headlines coming out from now till 11/30 will likely be about glut, low demand and OPEC countries bickering over terms – none of which is going to support prices.

    Granted, once they freeze and oil gets above $55 we know frackers will pile on and drive prices down…but then that’s where OPEC starts cutting. They know that, and is why they’re in a mad dash to increase supply before November.

    With UWTI currently at $25 with a historical (split adjusted) range from $11 to $6600, what’s not to love. I don’t care if it takes oil one year or seven years to get back to $110 (or $140) barrel, I’m in and will keep buying more on every dip.

    • Kasadour says:

      Oil may eventually temporarily go back up to $110-$140 and could potentially go higher if investments in the energy sector don’t dry up completely. But I wouldn’t expect or wait for a production freeze to effect higher prices. The Saudis are in deep financial trouble and they can’t afford to reduce or freeze production at this or any point really. KSA banks are insolvent and they [still] can’t pay their foreign workers, 1000s of whom are still stranded out in the desert awaiting paychecks and exits visas.

      If this oil rally breaks back through key support levels it could be a very long time before it goes back up above $50 if ever. I just don’t see it happening.

      Even if a freeze is agreed upon (unlikely), how long will it take before word gets out that an OPEC member nation has violated the agreement? Furthermore, a freeze that could potentially drive prices up again won’t hold long in this so-called fragile economic before demand destruction rears its ugly head again the stalls out economic activity, then down it goes. All over again.

      That, aforementioned, is to say if markets function normally. If the FED is hinting that it will [start to] buy stocks directly, what’s to prevent the it from sticking its dirty little fingers in the oil markets? Then it’s game on.

      As Steve Carell as Mark Baum said regarding commodities (namely oil) in the Big Short: good luck with that.

      • Patrick says:

        I can agree that oil will be volatile over this and next year, but right now all anyone sees is glut and not the potential for prices to return back to normal. For me it distills down to who wants prices to go higher, who wants prices to go lower, and which among those have their hand on the controls.

        Those who want/need higher oil prices:
        – OPEC
        – Frackers
        – Pipeline companies
        – Every government on the planet (i.e. in the US it means higher tax revenue, frackers are in the black again and bank loans to them are more solvent)

        Those who want want/need lower oil prices:
        – Consumers

        So I only have to ask – which one of these 2 groups controls oil output? And where are we headed over the next 5 years amid rampant currency devaulation along with the threat of wars, tariffs, sanctions & embargos?

    • r cohn says:

      A word of caution on UWTI .
      First it is an ETN ,which is debt of the underlying issuer.If the issuer goes under,you are in line with the other creditors
      Second and more painful is the problem with daily tracking.
      Over a period of time this can be disastrous
      Just as example.crude traded at ~51 in early June.Currently crude is ~49.
      In early June UTWI topped out at 41.7.Currently it is 26.6
      In Feb crude was ~26.75 while UTWI was 13.1
      Crude has gone up %83 while UTWI has gone up %103 well below triple the move in crude
      These double and triple ETN’s are Ok to trade on a short term basis but are some of the worst products ever invented for the investor so be aware

      • Patrick says:

        Yep, contango is something to keep an eye on with any leverage but I make a point to invest relatively small amounts in 3X ETFs for two key reasons.

        1. I’m not risking a whole lot but stand to make a nice payday down the road.
        2. Because I’m not risking a lot I can afford to buy the dips and sell out my original position at break-even (thus lowering my cost basis).

  4. walter map says:


    US shale oil recovery underway

    A couple of years premature at least, I think.

    • night-train says:

      “A couple of years premature at least, I think.”

      Bingo! We have a winner. I keep hearing layoff talk from the folks I know still in the biz. Maybe it is the same type of recovery the general economy has enjoyed. It is a stealth recovery.

  5. r cohn says:

    Inventories are the ultimate result of any supply/ demand imbalance.
    Currently crude inventories are at all time highs for this time of year.As worldwide inventories approach capacity the crude oil market faces a situation where the price could reach the marginal cost of production.This varies by region but is much.much lower than current prices.
    I have seen various estimates regarding how more storage capacity is available,but it ranges from 150m to 300m barrels.If supply continues to outstrip demand @ 700,000/day ,125m more barrels will be put in storage by the end of March.
    The question of oil demand is an interesting one due to questions about China. There is no doubt that a % of Chinese demand last year resulted from a buildup in their strategic reserves.Some reports indicate that China is almost finished with this buildup.The fact that some teapot dome refiners in China were exporting gasoline to the US last summer reinforces the idea that Chinese demand is not as robust as some think
    The Opec deal will not reduce supply; it is only suppose to freeze supply.Buy the probability that a number of countries will cheat on this agreement is almost %100.

    • Camerons says:

      OPEC matters to wishful thinking speculators. What oil bulls don’t understand:
      – 100% of OPEC members cheat 100% of the times and they all know it and that’s their modus operandi.
      – There is overcapacity/overproduction in the oil industry due to over investments. Until some are taken off line for good the oversupply will continue unabated.
      – Global economy is slowing to a crawl. Expect lower demand in the months and years ahead.
      – Freezing production while pumping at full capacity won’t help the bulls.
      – Strategic reserve storages are full.
      – Slow steaming, more floating storages, production freeze hope, robust global economic recovery hope, wars and natural disasters hope. Good luck!
      – Oil prices rising several percentages a day only means prolongation of overproduction and confirmation that prices will be at lower levels for as long as the shenanigans continue and speculators pour more money into the industry.

  6. wratfink says:

    I believe the oversupply of gasoline can be directly attributed to the tight oil boom. I think most of this light tight oil is more molecularly suited to lighter grades of hydrocarbons such as gasoline and naptha and feedstock for plastics.

    This leads to a gasoline oversupply worldwide since most of the world uses the long chain molecule heavy crude for diesel motor fuels. That is mostly what the US imports from Venezuela and Canada and most of the refiners are set up for.

    Until the Bakken supply peters out there will continue to be an oversupply of gasoline. Unfortunately, I believe demand is going to drop and supply will never drop fast enough to catch up. The price will continue to drop and bankruptcies will increase until the price is so low that what remains in the ground will stay there. TEOTWAWKI.

  7. james wordsworth says:

    So 69% of Americans don’t have $1,000 in savings.

    So what has been propping up the US economy for the last year? Lower oil prices – a direct into the pocketbook savings for everyone (not just the rich) – and since the US has low gas taxes and americans use more gas guzzlers, the drop (and the savings) has been much bigger in percentage terms than in say Europe.

    Pop oil up above $50 again and it is a new “deduction” from income for the average American … probably enough to tip things into a recession, unless we miraculously see wages rising.

  8. Pete Calacci says:

    Here is the EIA’s U.S. Gasoline retail sales by refiners history. It looks like we will have a glut for some time unless production gets cut considerably.

  9. night-train says:

    There was a pipeline leak in a gasoline pipeline in Shelby County, Alabama a couple of weeks ago. The pipeline was shut down to the northeast for more than a week. Made a lot of people nervous in parts of the southeast US. Prices went up substantially in some markets, as shortage fears were hyped. I didn’t pay a lot of attention to the event, as it was obviously a short-term disruption. But a lot of people were really stirred up. There appears to be little elasticity in a lot of folks’ budgets.

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