Commodities 4 minutes to read

Oil turning lower ahead of weekly stocks report

Ole Hansen

Head of Commodity Strategy

Summary:  Crude oil is once again closing in on key support levels after trading nearly 3% lower ahead of today’s weekly stocks report from the Energy Information Administration.

Oil prices are closing in on key support levels after falling by almost 3% into today's weekly inventories report from the Energy Information Administration. The firm rejection of the mini-recovery earlier this week confirms that the risk of further losses barring any geopolitical boost. It also highlights crude oil’s current, fragile state given the overriding focus on demand growth concerns. These demand worries have led to speculation that the Opec+ group will need to keep production cuts in place well into 2020 if they can agree to a deal. The "if", it should be noted, is creating some nervousness with Russia yet to commit to maintaining production cuts into the second half. 

Adding to the market's uncertainty was yesterday’s stocks data from the American Petroleum Institute which reported another counter-seasonal build in crude oil stocks of 4.85 million barrels. Inventories at Cushing, the delivery hub for WTI crude oil futures, were reported to have risen by 2.37 million barrels which if confirmed by the EIA later today would be the largest build since February.
The seasonal charts below highlight the unusual direction that crude oil stocks have taken in recent weeks. Normally this time of year sees refineries return from maintenance to ramping up production of gasoline ahead of the peak driving season. So far, refinery demand has picked up but is currently trailing last year.

Instead of falling, gasoline stocks have (just like oil) been rising, thereby raising questions about the current level of demand from US motorists at a time where markets are worried about a lurking economic slowdown. 
Staying on the theme of demand growth, the first of three monthly oil market reports was released last night by the EIA with Opec to follow on Thursday and the International Energy Agency on Friday. In its Short Term Energy Outlook (STEO), the EIA downgraded world oil demand growth for 2019 to 1.22 million barrels/day. Non-Opec supply was also reduced due to a reduction in US shale oil growth.
WTI crude oil has been testing support at $51.6/b, the 61.8% retracement of the December to April rally and a level that it has so far managed to close above.

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