Tight Oil Stocks & Surging Demand

Over the last four weeks total crude oil stockpiles, including the SPR or Strategic Petroleum Reserve, have fallen at a rate of 1.15 million barrels a day. This is the largest four-week decline on a rolling basis in Energy Information Administration data going back to 1982. That is the fastest rate of decline in  US crude oil inventories in decades!

U.S. Oil Demand

The strength of the U.S. oil demand recovery is underpinned by these record rate drawdowns and this is just ahead of talks between OPEC and it's allies on Thursday to negotiate a potential output increase.

As the U.S. emerges from months of lockdowns, Americans are taking to the roads and skies in increasing numbers. Earlier this month, California, America’s most populous state, re-opened its economy, while New York ended most of its lockdown restrictions. To meet demand, oil refiners boosted crude processing to levels to pre-pandemic levels. 

Supply Outlook

The global supply situation looks set to remain tight as OPEC and its allies have yet to come to an agreement on how much shut-in oil to return to the market. That has delayed preliminary talks between ministers by a day to allow more time for a compromise before Thursday’s discussion. The International Energy Agency has warned of supply deficits in the second half of this year unless OPEC acts fast to add more crude. 

Crude oil stocks in Cushing, Oklahoma, the delivery point for WTI futures, are at the lowest levels in over a year. Indeed, some analysts are forecasting that these stock levels will drop to multi-year lows by the end of the summer.

At the same time U.S. drillers have been slow to respond to higher oil prices, which are up more than 50% so far this year. Domestic crude production is holding at roughly 15% below peak levels seen early last year. 

Spreads

Looking at the Nymex calendar spreads, we can see that the September West Texas Intermediate futures contract has increased to $1 a barrel premium over October for the second time this month. This suggests that the market is expecting ongoing supply tightness through the summer. Prior to this month, the spread between the second month and third month WTI contracts hadn’t exceeded $1 a barrel since 2018.

Overseas interest in American crude oil has also been climbing despite a bumpy recovery from the health crisis in Asia and Europe. Exports of U.S. crude remain strong even as rallies in WTI have narrowed its spread relative to the global benchmark Brent, to less than $2 a barrel.