U.S. commercial crude stocks have been falling at a faster-than-usual pace this summer. Yet, the decline in inventories in the past four weeks has failed to ignite a rally in U.S. crude oil prices, or in Brent, amid lingering concerns about demand in the world’s top crude importer, China.
Even with rising geopolitical tensions in the Middle East, oil prices have just booked their third consecutive weekly drop despite draws in U.S. crude inventories reported by the Energy Information Administration (EIA) in the past few weeks.
Between June 21 and July 19, commercial crude inventories in the United States fell by a total of 24 million barrels, per EIA data compiled by Reuters market analyst John Kemp.
But money managers on the paper market have repurchased most of the previous short positions in WTI crude oil, leaving the market with little room to support a rally in prices, according to Kemp.
WTI Crude prices fell below the $80 per barrel mark last week despite yet another week of falling U.S. crude inventories and higher implied gasoline demand in the United States.
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While rising tensions in the Middle East have kept prices from collapsing, gains have been limited by concerns about weaker demand in China and signs that the physical crude market is not as tight as many analysts had expected at the start of the summer.
A risk-off mood on the oil market has also weighed on prices.
Last week, for example, the EIA reported an inventory decline of 3.7 million barrels for the week to July 19.
This compared with an inventory draw of 4.9 million barrels estimated by the EIA for the previous week. Gasoline stocks shed 5.6 million barrels in the week to July 19, with production averaging 10.2 million barrels per day (bpd).
This compared with a build of 3.3 million barrels for the previous week when production averaged 9.5 million bpd.
In middle distillates, the EIA estimated an inventory decline of 2.8 million barrels for the week to July 19, with production averaging 4.9 million bpd.
This supportive bullish report on U.S. inventories failed to keep prices higher for more than a day, even if implied U.S. gasoline demand is estimated to have increased by 673,000 bpd in the week to July 19 compared to the previous week.
“Although the latest EIA weekly stocks data have helped flip the month-to-date July observable on-land stocks trends from a build to a small overall draw, while recent US gasoline demand has looked much stronger, oil markets remain in risk-off mood,” analysts at consultancy FGE wrote in a note on Friday.
The main bearish drivers last week were concerns about China’s oil demand in the second half of the year and weaker-than-anticipated manufacturing data for the United States and Europe, according to FGE.
The implied high U.S. gasoline demand could be partially due to a release of delayed gasoline deliveries to filling stations, which were unable to stock up around July 8 due to Hurricane Beryl in Texas, the consultancy noted.
“As such, without further evidence yet of sustained stockdraws, any upside for crude prices and structure may be limited in the immediate short-term,” FGE said.
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A strong hurricane season could upend this forecast if refining operations in the U.S. Gulf Coast are disrupted.
The rising tensions in the Middle East, with the possibility of a wider Israel-Hezbollah conflict, could keep prices supported in the coming days.
But lingering concerns about the state of China’s economy and oil demand in the second half of the year continue to be the major drag on oil prices. U.S. stock draws could continue until September, but Chinese oil consumption could continue to disappoint and push prices lower. This could lead to OPEC+ delaying the easing of its production cuts, which is currently expected for the fourth quarter, depending on market conditions.
By Tsvetana Paraskova for Oilprice.com
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