Crude Oil Markets Increasingly Concerned About Elevated Supplies

Crude Oil Markets Increasingly Concerned About Elevated Supplies

A sea change in oil markets could be underway as a narrative of geopolitical risk turns to once of concern about bloated inventories.

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With much of the worlds focus in financial markets focused on United States stock indices right now, the its important to note the global crude oil market has remained in flux and had its share of intense newsflow.

With tensions between Saudi Arabia and much of the developed world along with the looming sanctions on Iran taking the spotlight on the fundamental side, concerns have started to build about a building surplus of oil inventories.

In short, while tensions run high, which is normally bullish for price, the world is pulling more oil out of the ground than ever and there is no end to the production boom in sight. 

Oil opens the week above the critical level of 67.00. It is our opinion that a break lower and consecutive closes below 66.50 could signal additional downside momentum.

Oil has sold off of highs in the mid 70's acheived just a few weeks ago primarily due to a narrative of overwhelming supplies coming into markets. 

The United States alone is producing over 2 million barrels per day more than this time last year, and the trend is clearly extending higher meaning even more supply is on the way. Further confirming this, the Baker Hughes rig count reported another weekly increase last week in the number of oil rigs moving into production.

 

Curiously, imports have also been edging higher when compared to prior year. There can be a good deal of volatility in month to month import data, but the trend is slightly up over prior year lately and further compounds the over supplied situation in the United States, which is the worlds largest economy and consumer of oil.

Downstream, a key indicator for us that this situation could last over the medium term is the swollen levels of gasoline inventories across the United States.

 

And the picture for gasoline demand remains challenging for oil bulls as well. Demand for gasoline has actually been falling, and trending under prior year.

 

With less demand for finished products, and much more production lifting off, it is hard to see an upside catalyst for oil markets through the end of the year.

The geo political situation could always worsen, and traders should be closely attuned to political developments. However, much of the current risk in the environmment seems priced in, and if there is any improvment, or at least status quo, it could open the way for a move lower for crude oil prices as more and more oil floods markets.

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