Oil Hits New Record as U.S. Crude Stocks Plummet

Oil prices have again reached a new high after the latest data from the U.S. Department of Energy (DOE) pointed towards a large draw in crude oil and gasoline (petrol) inventories this week. NYMEX crude July futures last night closed at a record high of US$133.17/b, after hitting an intraday record of US$133.38/b. Prices then went on to hit US$134.15/b in after-hours trading and have for the first time breached the US$135/b barrier during trading this morning, hitting a new intraday high of US$135.04/b. In London, ICE Brent July futures also closed at a new record high of US$132.70/b—up US$4.86 on the day.

In the United States, the Energy Information Administration (EIA), the statistical arm of the DOE, released its latest weekly crude inventories data showing a large draw in stocks of both crude oil and gasoline. Crude oil stocks during the week fell by an unexpectedly large 5.4 million barrels, while gasoline inventories dropped by 800,000 barrels. Aggregate stocks levels for both crude and gasoline are now at 320.4 million barrels and 209.4 million barrels, respectively. Crude stocks are 23.8 million barrels lower than this time last year, though they remain roughly in the middle of the five-year range. Gasoline stocks are up 12.7 million barrels compared to last year but also remain in the middle of the five-year range. The largest crude inventories draw was registered on the U.S. West Coast, where stocks fell 6.3 million barrels.

U.S. oil production is down to 5.045 million b/d, some 83,000 b/d lower than last week, while crude imports have also dropped to 9.237 million b/d— down 696,000 b/d on the week. Over the same period, refinery utilisation rates have increased to 87.92%—up 1.3 percentage points—driving up finished motor gasoline production by 124,000 b/d, to 9.028 million b/d. Production of jet fuel is also up around 81,000 b/d compared to last week. Refined product imports are now at 3.507 million b/d—up 47,000 b/d on the week.

Outlook and Implications

While the U.S. summer driving season, which officially begins this coming Monday (26 May), will also bring with it higher demand for gasoline as families across the country take to the road for their annual vacation, that demand is likely to be lower in light of the fact that the average retail price of gasoline has again reached a new record of US$3.791/gallon. Furthermore, there is little hope for relief, given that the EIA has previously speculated that the average retail gasoline prices could top US$4/gallon this summer, mainly as a result of increasingly expensive oil.

As before, the weakness of the U.S. dollar continues to influence oil prices as the larger funds hedge against inflation in the United States by seeking exposure to U.S. dollar-backed commodities in a process that itself further exacerbates the greenback's weakness. The euro this morning hit a high against the U.S. dollar of US$1.58—the highest level seen in a month, driven mainly by the release of the U.S. Federal Reserve's minutes of its April meeting suggesting that interest rate cuts had come to an end but that U.S. economic growth this year would be less pronounced than originally expected. This spate of bad news on the economic front in the United States will likely temper short-term crude oil price gains as demand in the world's biggest oil consumer continues to fall. Demand for crude in Asia, however, continues to be strong, protected in many cases by government subsidies that effectively put a cap on what consumers pay at the pump. As such, overall demand is unlikely to fall much below the level where sizeable inventory gains push down oil prices.

Lawmakers in the United States have again been seeking for targets to blame for the latest round of oil price records, with attention shifting haphazardly between the three usual suspects: speculators, OPEC, and big oil. As ever, not enough emphasis is placed on more structural problems in oil markets such as the growing mismatch between continued strong global oil demand growth and evidence of a plateau in world crude oil production. The NYMEX December 2016 crude futures contract has risen to a record high of US$142.14/b, with an uptick in long-dated crude futures observed between 2010 and 2011, and in itself suggestive of expectations of a potential supply/demand crunch at that point. In the markets, concern regarding the longer-term oil supply/demand balance is, however, also being guided by some of the more bullish forecasts issued by prominent investment banks in recent days. While oil prices would seem to be due a sharp price correction in the latter half of the year on the back of weakening demand in the world's largest consumer, the longer-term fundamentals continue to be bullish for oil prices. At the time of writing, the NYMEX front-month crude contract was trading lower at US$134.65/b.

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