Crude Prices Drop as Traders Ignore Huge Inventory Draw

But OPEC may save the day yet by changing the way it gauges oversupply: File Image/Pixabay

For once, analytical forecasts about crude inventory draws proved to be vastly underestimated on Wednesday with the disclosure by the Energy Information Administration that oil fell by 10.8 million barrels in the week to July 19, compared to an expected 4 million barrel decrease.

But ironically, expectations that such a drawdown would assuage the low global demand fears dogging the market of late were proven incorrect, as traders on Wednesday were said to have resumed their hand-wringing over the prospects of an economic slowdown.

The result: Brent dropped 65 cents to settle at $63.18 per barrel, while West Texas Intermediate fell 89 cents to settle at $55.88 per barrel.

Presumably kindling concerns was the news that Saudi Arabia and Kuwait are discussing resumption of oil production in jointly operated fields in the Saudi–Kuwaiti Neutral Zone, which four years ago produced some 500,000 barrels per day (bpd).

Phil Flynn, senior market analyst with Price Futures Group, tried to explain traders' behaviour by theorizing that they believe the U.S. drawdown was probably due to Hurricane Barry, "and so the market is not overreacting to it."

Ashley Petersen, an oil analyst at Stratas Advisors, agreed: "I think markets realized pretty quickly that was a transitory draw and isn't likely to be repeated."

It's unclear whether analysts took any solace in reports that the Organization of the Petroleum Exporting Countries (OPEC) will discuss changing its methodology for assessing the state of the crude market, which in turn helps them decide how much of the commodity to add to or remove from the market.

OPEC, which up until now used the period 2010-2014 as one metric to assess the success of its activities, is said to favour using 2010-2014 as the main metric moving forward, the rationale being that the 2010-2014 average preceded 2015-2016, when inventories rose at unprecedented levels.

Given that stocks in May were 220 million barrels above the five-year average in 2010-2014 compared to only 6.7 million barrels under the 2014-2018 metric, this would compel OPEC to continue or even deepen its output cuts - which in theory should offset the current fears of waning demand.