Ahoy Ahoy: Floating Storage Coming Ashore

The chart above (Chart 1) puts this week's bearish US oil inventories (released each Wednesday) in perspective. Oil prices dropped by US$4 to almost US$68 per barrel (NYMEX WTI).

Chart 1 shows total US oil inventories by week. Total US oil inventories increased by 8.5 million barrels.  The second chart (Chart 2 below) shows US oil demand which looked as if it may have reached an inflection point over the past month (US gasoline demand is strong, offsetting weak diesel and jet demand).

The big question is now: has something changed that has suddenly derailed the recovery in demand and decline in US oil inventories seen over the past 2 months, or is the past week an anomaly?

One thought is that the increase in inventories could be oil in floating tankers coming onshore now that the forward curve is flattening which removes the incentive to store. So either the forward curve goes into steep contango again or flat price oil is about to fall (or a combination of both) as this floating material comes onshore. Or perhaps extrapolating a single week’s counter trend data point (the trend being falling inventories and higher prices) is not such a wise decision?

The last few weeks of September are always quite a volatile time for US demand and inventories. We are in the low demand shoulder period between driving and heating oil seasons.  This week's numbers could be reflecting the data noise during this seasonal transition.

US Inventories & Summer Doldrums

Chart: Crude Oil (NYMEX WTI) Prices Over the Past 8 Days

The oil market has been chopping sideways around $70 over the past few days. Weekly US oil inventory numbers are released by the DOE each Wednesday at 10:30am New York time. This week the data provided little impetus for any price move for the oil complex. Bear is mind that although US data is widely followed, it is the source of less than a quarter of the world's demand. Nonetheless, US data is viewed as a barometer of global supply and demand. I was quoted in the Wall Street Journal today:

The draw in crude stockpiles and the rise in gasoline "offset each other, and the effect on the market was neutral," said Morgan Downey (WSJ)

Plus ça change

How much oil is stored in the European Union (EU)? Official oil inventory reporting in the EU is weak compared to that compiled in the US. Today the EU "overhauled" its reporting mechanism for oil inventories but rejected a proposal to report inventories weekly (as they are in the US). From Reuters:

"Monthly reporting of stock levels is a small change from the current system under which EU states must confirm each month whether they hold 90 days-stocks, but need provide no more detail." (Reuters)

The Oil Drum Posts a Key Chart

The Oil Drum posted an updated chart of mine on Feb 26, 2009 showing crude oil inventories at Cushing beginning to fall. This is often indicative of a turnaround in oil prices which have been down in the $30s over the past few weeks.