As reported in October 9’s The Globe and Mail (Canadian English newspaper based in Toronto), crude oil inventories have been coming off skyrocketing levels, which is generally an indication that demand is picking up. However, the downturn in stocks is perhaps more closely related to the mood shift among commodity investors, who are less optimistic about the longer-term oil markets than they were last spring.
This turnaround - from building inventories to reducing them - will increase pressure on crude prices as producers are forced to compete with supplies being pulled out of storage.
Yesterday, crude prices fell $1.31 (U.S.) a barrel yesterday to $69.57 on the New York Mercantile Exchange, despite a report from the U.S. Energy Information Administration that crude inventories had fallen last week.
A decline in stocks would normally be bullish for crude markets (suggesting demand is on the uptick.) Yet it appears refiners are processing higher volumes of crude, simply to store the finished gasoline and other products instead of selling to motorists, airlines, truckers, etc. The EIA reported inventories of petroleum products climbed by 3.6 million barrels.
Industry analyst Jim Rittenbusch said the world is "buoyant" in crude oil, with higher-than-average stocks in the United States, and a fleet of tankers storing crude offshore.
Earlier this year, crude prices were bolstered by traders who bought current production and put it in storage, while selling it for future delivery at much higher prices.
With the U.S. dollar under tremendous pressure this year, financial investors, including major brokerages and retail investors, have been flocking the commodity markets as a barricade against both the dollar and inflation. Speculators bought futures contracts, which promised delivery roughly one year later, on the assumption the economy would be revived and demand would be greater than in late-’09 and early’10 than it was in the first half of this year.
Today, the oil market remains well-supplied, even as demand has rebounded somewhat from the lows of early ‘09. Producers in the Organization of Petroleum Exporting Countries continue running the taps, despite agreements to slow production, while Russia is producing more oil than expected.