Starkey Analysis of U.S. EIA Oil Inventories Data: Crude oil inventories grew by just shy of 5 million barrels in the week ending March 17th. This was driven largely by a reported jump in imports of some 900,000 b/d. Refinery runs ticked higher by 330,000 b/d, though exports were reported to have fallen further to only 550,000 b/d. Another 626,000 barrels of crude was reported to have come out of the SPR bringing the total to nearly 1.7 million barrels thus far.
Crude inventories notched another record high level for the US, though overall oil inventories continue to look improved versus last year. Total oil inventories entered the year 54 million barrels above year ago levels, and that has been lowered to 24 million barrels as of last week. Most of that improvement has been driven by some of the more minor oil categories, like fuel oil and propane. Crude oil inventories continue to be the most bloated on a relative basis.
This commentary has been consistent for the past couple of months talking about how the market's expectations were outweighing current fundamentals. That had been the catalyst for higher prices since last November. Those expectations were driven by two narratives:
- OPEC/non-OPEC supply cuts would usher in a swift market rebalance, and
- the Trump administration's agenda would quickly set in motion a fiscal policy that would stimulate economic activity...the so-called "reflation" trade.
Both of those narratives hit almost simultaneously late last year. Oil prices responded in kind. Over the past couple of weeks, however, some have begun questioning the validity of both. I.e., both narratives are breaking down. Oil prices are responding as expected. The biggest short term risk remains the health of these two narratives.
While non-commercial ("spec") net length in crude oil futures and options has fallen from historic highs, it is still relatively elevated. There is likely over 100,000 contracts of that recent net length that is currently underwater (got long at prices above current levels).
One can be expected to hold onto a losing position if the narrative is still firmly in their favor. However, as noted, that may no longer be the case, and that should be the question market participants are asking themselves when pondering whether another round of liquidation may occur.
