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Oil stocks are still too high
Posted: 06 Jul, 2016

There's a 'last ugly chapter' for crude oil, and we haven't hit it yet

Commodity investors generally agree that the oil market is coming into balance, but huge stockpiles of fuel and teeming strategic Chinese crude inventories could send prices on one last, ugly slide lower, analysts told CNBC.

On Wednesday, oil futures were down more than 1 percent, following nearly 5 percent slide Tuesday, on worries that Britain's vote to leave the European Union would slow economic growth and dent crude oil demand. Expectations of U.S. crude stockpile growth and further weakness in the Chinese economy created additional headwinds.

In recent weeks, supply and demand have appeared tantalizingly close to balancing each other.

Oil markets at least briefly appeared to be oversupplied by about 350,000 barrels of oil per day last week, based on an average of major investment bank estimates, according to Tom Kloza, global head of energy analysis at oil price information firm OPIS.

However, even if crude supply moves unmistakably into balance, markets will still have to work through record stocks of refined products, particularly gasoline, Kloza said.

U.S. gasoline stockpiles ended the week through June 24 at nearly 239 million barrels, only about 20,000 barrels below the record struck in February. Meanwhile, U.S. crude inventories totaled 526.6 million barrels, just below April's high.

With the peak summer driving season winding down, gasoline inventories could creep up and push down petrol prices. According to Kloza, that may keep some refinery capacity idle and cause another jump in stockpiles of crude, the feedstock for gasoline.

"Think of the worst undertow you can imagine for currents. It's an undertow that I think drags crude for the final dip lower," he added. In his view, oil prices are more likely to slip below $40 a barrel before they top $55.

Fadel Gheit, senior energy analyst at Oppenheimer & Co., on Tuesday also said that record high gasoline stockpiles would continue to exert pressure on oil prices. 

U.S. oil production fell to 8.9 million barrels per day in April from a high of nearly 9.7 million barrels one year ago, according to the U.S. Energy Information Administration.

"We have to recognize that oil prices are likely to remain lower for longer than expected," he told CNBC's "Squawk on the Street."

The rapid rally from this winter's 12-year lows is the result of oil prices falling too far, Gheit said. He noted, however, that $40- to $50-oil is not sufficient to create investment in new production that eventually must come online to meet future demand.

For the time being, reports of tankers anchored off New York Harbor, unable to offload gasoline components because storage is full, show that the fuel glut remains a headwind, said John Kilduff, founding partner at energy hedge fund Again Capital and a CNBC contributor.

"Unfortunately through the run-up to peak driving season, we had some decent builds. The refineries were just cranking it out," he told CNBC. "Now we have this big overhang. Demand falls down appreciably as you go into the latter part of July and certainly as you get into August."

Additionally, Chinese refiners have been exporting record amounts of diesel, he said. In Kilduff's view, the fuel glut's effect on crude could materialize as early as August or September, just ahead of the fall refinery maintenance season, when crude demand will dip.

Adding to the demand dilemma, economic data from China in particular and Asia more broadly remains weak and Chinese strategic reserves are nearly full, he said.

"If the demand somehow rebounds I can get more constructive." he said.

SOURCE: CNBC

 

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