WTI resumed the general downward trend it has been in this month, despite the presence of some factors we traditionally thought could push it higher.
Analysts aren’t expecting the tensions over an attack on an Israeli-linked oil ship off the coast of Oman to affect negotiations of a new Iran nuclear deal.
Meanwhile, concerns over demand growth for the next few months have kept the price under pressure.
Some analysts are suggesting that OPEC might have increased production too fast, even though the long-term projection still shows supply constraints. In fact, India’s demand for gasoline has already returned to pre-pandemic levels.
That said, concern over the delta variant means there isn’t much expectation for a significant increase in crude consumption in the near term.
Why are stocks down?
In their quarterly report, BP highlighted one of the less-discussed dynamics in the oil market, the crash in oil prices.
This crash caused the supply-demand offset at the beginning of the pandemic and hasn’t been fully resolved yet. In fact, a lot of major oil companies continue to see relatively poor profitability, despite significantly higher crude prices.
When oil futures went negative, a lot of firms and investors took advantage of the situation to buy up inventory, some managing to hold up to two years of normal use.
With demand below average for well over a year, it’s taken even longer to work through those inventories. As it stands, BP doesn’t expect market dynamics to normalize until December.
Why we should still worry about inventories
So, it’s within the “normal” recovery process for crude inventories to fall.
If there is a consensus that crude prices are near the top of the post-pandemic range, then wholesalers are more likely to wait for dips to replenish their stocks. In that scenario, inventories turn more into a lagging indicator than a leading one.
Expectations are for US EIA crude oil stocks to diminish by another 5.0M bbl. This would return the stocks to the downward trend that was briefly interrupted two weeks ago.
Prospects for the future
Moving forward, the lack of GDP growth in the US (oil’s largest consumer) combined with expectations of inflation are having a tug-of-war with the price of crude.
Ordinarily, investing in crude is a good hedge against inflation. But if inflation is too high, then the economy won’t grow. This means there won’t be as much demand for oil, so the price won’t go up so much.
And as current news keeps on weighing more on inflation and on the overall economy, we can expect a more choppy crude market.
However, we can observe a general theme that oil producers are still reluctant to invest in more production, despite the higher prices. In fact, global rig counts have only returned to half of what they were before the pandemic.
Oil producers are shifting increasing amounts of their capital expenditure towards renewables. This is because several major carmakers have pledged to build only EVs by the end of the decade.
Altogether, it’s possible that the supply of crude could remain constrained for a long time.