US commercial oil inventories rose 2 million barrels last week after rising 8.8 million the previous week. This dynamic is part of seasonal patterns, with stocks starting to fill around September. During the same time period and at the same volume, net accumulation reversed in 2018 and 2019. However, note that prior to 201
(shale boom), inventory fluctuations were mostly in the 300-360 million range. So here we consider business as normal for commercial growers.
A key take on the picture is that strategic reserves have fallen by 30% over the past year, roughly equal to commercial reserves.
In other words, a sharp drop in total inventories can stimulate production to accelerate. But the number increased slowly compared to the 2011-2015 and 2016-2020 episodes. And there are a few important reasons for this.
First, the sale of oil from reserves is aimed at lowering the final price, which is against the will of producers and hinders investment. Over the past two weeks, the number of rigs working in the United States has decreased, which clearly shows that companies are in no hurry to sell oil at a discount to the open market, thus replenishing reserves.
Second, production in the Permian basin – the main shale production area in recent years – is declining. New drilling will catch up with depleted mines. Rate increases and the promise of more increases, combined with salary increases, further slow the process.
As if that wasn’t enough, US growers say Europe shouldn’t expect any further increase in supply. This could indicate that OPEC watchers have moved from competing for market share to maximizing profits.
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As a result, we saw oil and gas prices rise over the past week relative to the overall decline in financial markets. At the same time, we believe that the US government is unlikely to quickly abandon its policy of controlling oil prices, thus delaying the inventory rebuilding momentum.
Investors and traders should also keep in mind that a decisive tightening of policy will, by historical standards, put additional pressure on prices. In our view, the decline in oil prices is not over yet, although a domestic attempt to push WTI above $91.50 and Brent back to $97 cannot be ruled out.