There are lots of things that can confound analysts these days, chief amongst which is the weekly changes in US crude oil inventories. During the past four weeks it was impossible to get it right. Having said that, the movements in US crude oil stocks have been erratic lately. They built 5.7 million bbls at the beginning of the month only to fall 7.5 million bbls a week later. There was yet another increase (+4.9 million bbls) for the week ending July 17 whilst the latest stats showed a hefty drawdown of 10.6 million bbls. The fall went against expectations as analysts forecast a slight increase. It was the steepest drawdown this year.
The rise in refinery utilization rate would be an obvious candidate for this fall in crude oil inventories but it is not the case. Although runs were up 1.5% last week, this increase was largely due to the jump in PADD1 where refiners upped their utilization rate by 11% from 36% to 47% but crude oil stocks only drew 551,000 bbls there. The culprit is imports. Net crude oil imports dropped below 2 mbpd for the first time for two months. This is the second lowest weekly reading in 19 years. The 1 mbpd decline in net arrivals is the result of a fall of 800,000 bpd in gross imports and a rise pf 200,000 bpd in exports.
When net crude oil imports fall usually the USGC takes the brunt of it. PADD3 was solely responsible for the nationwide crude oil stocks draw as inventories there declined 10.4 million bbls. The volume of foreign crude arrivals dipped by nearly 700,000 bpd. The OPEC+ cut is clearly being felt. Saudi crude exports into the US fell to 303,000 bpd last week, preliminary data suggests, down from nearly 1.6 mbpd in the second half of May. It is not just Saudi Arabia that is sending less oil to the US. Iraqi, Nigerian and Angolan exports have completely dried up.
The main product categories, gasoline, and distillates, both showed slight week-on-week increases despite draws were anticipated. The latter registered a new 38-year high in stock levels. Whilst it is not particularly constructive it has to be noted that demand is surprisingly healthy. Total consumption rose above 19 mbpd, the highest since the health crisis forced the country into a lockdown in March. Gasoline demand jumped 250,000 bpd and distillate consumption increased more than 400,000 bpd. If jet demand figures are anything to go by then the US aviation industry is also recovering. After air travel came to a complete halt jet fuel consumption was down at 352,000 bpd at the beginning of May. The revival is nothing short of impressive. Although weekly thirst for jet fuel was marginally down it is holding above the 1 mbpd level for the third consecutive week.
Falling crude oil stock and growing consumption depleted total commercial stocks by 6.5 million bbls week-on-week. This drawdown, only the third in the last 19 weeks, together with improving demand data should have sent prices much higher. After all, the latest statistics implied that the US is on its way to recover from the economic shock caused by COVID-19. Closing prices, however, were mixed. WTI and Heating Oil edged higher. Brent jumped 53 cents/bbl but RBOB came 241 points lower. There must be a reason for the subdued reaction.
Fed support also fails to excite
This reason is the uncontrollable pandemic. During the last recession the “bad news is good news” mantra was often cited as the catalyst for improving conditions. It meant unlimited fiscal and monetary support in the face of adverse and deteriorating economic data. It worked. Both equity and commodity markets recovered. The same tools are being employed now but there is a difference. The financial meltdown 12 years ago was man-made (or bank-made) but the current one is a health disaster. COVID-19 has not been contained and currently it is impossible to predict the end of pandemic. Bailing out companies 10 years ago helped the economy and supported the job markets all around the world. Today buying corporate bonds is far from providing a cure to ailing economies because the fast-approaching second spike in infections has a negative impact on the job market and limits the speed of recovery. Aggregate demand is lagging, and it is not clear when it will reach healthy levels again.
Probably this is the reason why the latest stimulus measures have faced a lukewarm reception. Tuesday’s announcement of the extension of the emergency lending by the Federal Reserve would have been greeted with cheers 10 years ago. This time US stock markets fell the day before. The FOMC meeting helped stock indices crawl higher yesterday as the Fed held rates close to zero and extended emergency swap lines with other central banks. This confidence, however, is tentative and is more of the function of low rates than solid economic backdrop. Even the Fed chairman warned that the re-emergence of the coronavirus started to weigh on the economic outlook. Today will see the release of the US 2Q GDP growth estimate (forecast is -34.1%) and the weekly initial jobless claims (1.45 million).
The upcoming US elections do not help either. The Republican plan to spend another $1 trillion on the US economy was countered by a demand for $3 trillion from Democrats. The horse-trading to carve out a deal could take weeks if not months whilst current measures expire tomorrow. In the meantime, the pandemic is spreading again in the US. Risk appetite is not insatiable anymore. Doubtless, investors are keeping a watchful eye on gold, which hit yet another all-time high yesterday. It is the safest of havens that gains popularity in times of hardship. And of course, one must not forget the rising tension between the US and China. Any potential thawing in this relationship would support equities but such improvement is not imminent. The latest move higher in stocks and oil has been impressive but now investors have turned careful and pragmatic.
As for oil, the uptrend that started in the second half of April came to a halt at the beginning of June. Over the past two months prices have moved in a range of less than $8/bbl basis Brent. The market is lacking conviction, direction, and impetus. The recent resurgence of the coronavirus is an ominous sign that the upside is limited in the immediate future. Looking at the big picture it is the containment of the disease that will provide the real confidence boost. Until then all long-term oil bulls are left with is hope.