Massive Inventory Drop Causes Crude Price Spike, But Analysts Say Fundamentals Remain Soft

Wednesday June 26, 2019

Commodity traders all but broke out the champagne on Wednesday with the news that U.S. crude inventories dropped by a massive 12.8 million barrels last week, according to the Energy Information Administration - and this caused them to send oil prices soaring.

West Texas Intermediate settled up 2.7 percent at $59.38 per barrel, while Brent rose 2.1 percent to  $66.42 per barrel.

The U.S. drawdown was the biggest since September of 2016, and it prompted John Kilduff, founding partner at Again Capital, to say, "That was one of the most bullish reports ever: domestic production ticked down, gasoline demand was strong, exports plunged, refinery utilization rose, it just had everything going for it."

Additionally, U.S. crude exports reached a record of 3.77 million barrels per day (bpd), while imports  fell to 800,000 bpd.

it was the second week in a row that inventories fell far beyond expectations, countering worries about the economy that have compromised oil prices.

Andrew Lipow, president of Lipow Oil Associate, contradicted the standard analytical line of thought regarding the global crude market of late by remarking, "As our production increases, there will be more available for the world market; world oil demand continues to grow, and we're supplying that increased demand as well as some of the shortfall [from Iran and Venezuela]."

But it just wouldn't be the crude market were it not for sobering forecasts amid the good news, and on Wednesday that was provided by Martijn Rats, global oil strategist at Morgan Stanley, who told CNBC television that prices will soon decline again due to geopolitical tension.

He added that "the actual physical disruptions tend to be very short-lived if at all and the price spikes tend to be very short as well," and he added that the fundamentals this year remain "very soft" and will continue into 2020.

Ole Hansen, head of commodity strategy at Saxo Bank, believes oil prices have hit a plateau: he told Bloomberg television that he would be "very surprised" if prices reached $70 because "the demand growth worries are still there."

Still, the U.S. drawdowns demonstrate yet again the unreliability of crude analytical forecasting as well as the continued shift of power to that country as the global leader in energy production - a notion that was reinforced on Wednesday with the disclosure that the U.S. sanctions against Iran and Venezuela have actually caused oil output to drop further than the initiatives undertaken by the Organization of the Petroleum Exporting Countries, which is expected at meetings next week to renew its output cuts - in order to maintain a balanced market - until the end of this year.