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Eithne Treanor: Inventories are on the decline, but not fast enough

Published: 22:25 06 Aug 2017 EDT

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Oil stockpiles in the US were down last week

The price of oil may be hovering in the fifties but the oversupply remains too high and sentiment remains too low. Inventories are on the decline, but not fast enough and not deep enough and in early trading on Friday Brent crude was still above US$51 with WTI holding below US$50 a barrel.

The dilemma remains a challenging one with producers getting used to lower for longer prices and no great prospects for the near future. Oil stockpiles in the US were down last week for the fifth week in a row, dropping 1.5 million barrels, according to the Energy Information Administration.

The market had expected a bigger decrease of 3.5 million barrels after a strong fall the previous week. Gasoline inventories were also down by 2.5 million barrels thanks to the continuation of a robust driving season. American gasoline demand is currently 9.84 million barrels a day. Refinery utilization is also looking healthy, currently above 95 percent.

Its reporting season for the major oil companies and Goldman Sachs said that second quarter results indicated how companies are adjusting to the lower oil price at around US$50 a barrel.

Efficiencies are in place and price expectations seem to be flat. BP says it expects the oil price to stay in the range of US$45 to US$55 in 2018 as shale production continues to thrive. BMI Research estimates that international companies are looking at a break-even target price of US$40 a barrel.

A leading hedge fund that bet on a stronger oil price closed its doors this week.

The CEO of Astenbeck Capital Management, Andy Hall said the company incurred severe losses on the back of low oil prices, so he folded the fund last week.

OPEC production remains high despite the much-hailed agreement to curtail supply. Crude oil shipments by OPEC and Russia were around 32 million barrels a day in July, up from 30.5 million barrels in June. This data was released this week from Thompson Reuters Eikon, a division that tracks tanker movements.

Economic growth will always be a hopeful indicator for oil producers. Last week’s data from the Chinese Caixin Manufacturing PMI rose to 51.1 from the previous month at just over 50 points. It’s now at its highest level since March this year.

The president of Prestige Economics in Texas has always maintained this figure was the one to watch in terms of impacting global oil demand in the future.

He sees the pace of growth in China is now one of expansion and acceleration and says, “the July 2017 Caixin reflected an acceleration in growth, after a rebound in growth seen in the June report last month,” and adds, “this is bullish for industrial metals and oil prices.”

While lower inventories and stronger demand should be positive signals, the ongoing stagnation in the market is crippling sentiment, investment and price movement. Without a major boost in demand and a greater fall or curtailment of production, it looks like we can expect lower oil prices for the rest of the year.

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