Robust Oil Inventories are Headwinds for Prices

Prices of crude oil is attempting for form a bottom. Traders are probing the downside and seeing if it is possible to generate a short squeeze. With current inventories at 80-year highs in the United States, it will be difficult for oil prices to mount a significant comeback.

Petroleum inventory data for countries in the Organization for Economic Cooperation and Development show the relationship between rising inventories and steepening contango. OECD inventory figures for August 2014, which is the latest data, show commercial petroleum inventories rose by 34 million barrels year-over-year.

The spread price between the June 2015 and June 2016 futures contract reflect high inventory levels by printing a reading that is in steep contango. Contango exists when prompt prices are below future prices. The contango is now near contract spread highs and reflect the benefit of holding crude oil in storage. A commercial entity can purchase physical oil and sell it forward, capturing revenues of $9.34 per share. If storage costs and financing are less than that amount an arbitrage profit is available. As long as this scenario persists at these levels, it will be difficult to incent traders to push crude oil prices higher.

The latest Short-Term Energy Outlook the Department of Energy forecasts OECD inventories to end January 2015 at 161 million barrels over last year, similar to the build experienced during the first quarter of 2009, when inventory builds reflected lower demand driven by a major decline in global economic activity.

The technical outlook for crude prices reflects the recent consolidation. Prices show support near $43.60 and resistance is seen near $50.00. The monthly relative strength index is printing a reading of 21, which is well below the oversold trigger level of 30 and could foreshadow a correction.

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