Oil Reverses on Crude Inventories, Chinese Data

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A huge run-up in inventories took some of the shine off the black liquid today partially reversing crude’s spectacular three day ascent.

U.S. stockpiles of West Texas Intermediate increased by 6.3 million barrels in the week ending January 30th to 413.06 million barrels, according to the Energy Information Administration in Washington, D.C. It was the largest crude oil inventory since records began in 1982, and the fourth straight week of inventory build. Analysts polled by Reuters had forecast an addition of 4 million barrels.

Crude oil was trading at $49.42 at 1:45 pm on the NYMEX in New York, 8.9 percent lower than yesterday’s high of $54.24 but still 13.5 percent above the January 29 six-year low of $43.53.

Crude oil’s seven month 60 percent price collapse from $107.73 in June has been fostered by changes in both supply and demand.

American shale oil producers have brought U.S. output to its highest level in almost 30 years. When that production is combined with OPEC’s unwillingness or inability to cut output, the world is awash in oil. Some producers are even storing crude in ships, waiting for a rise in prices.

At the same time global economic growth is receding. Japan is in recession, Europe close and with China slowing dramatically from its decades of double digit GDP expansion, consumption in three of the world’s four major oil markets is down and likely to fall further in the year ahead. The modest economic recovery in the United States is not nearly strong enough to make up the lost demand.

Overnight Chinese data underlined the new reality on the mainland. The HSBC composite purchasing managers’ index for January came in at 51.0, down from 51.4 and the lowest score in eight months. The service sector PMI at 51.8 was the weakest since August and a steep drop from December’s 53.4.  Index readings above 50 indicate expansion and below contraction.

Of more indicative importance for the Chinese economy and oil consumption is the contraction in factory production.

The final HSBC manufacturing PMI for January was revised down 0.1 to 49.7. It was the second straight month below 50 and a definitive end to six months of modest expansion. The official Beijing PMI for January acknowledged the decline in manufacturing, unexpectedly registering 49.8, the first sub-50 score in 28 months.

Even though U.S. drillers idled 94 rigs last week, the greatest seven day drop in data going back to 1987 and have taken 352 rigs from production or exploration in the past two months, there is more than enough surplus current production to prevent a price rise.

Indeed with several producing countries, particularly Russia, Venezuela and Iran under serious financial stress and Saudi Arabia, the world’s largest marginal producer pursuing market share, a significant decline in production is not in the immediate future.

Despite the recent rebound in crude prices a substantial recovery is unlikely until either the supply or demand equation changes.

A long lasting trend reversal is even more improbable until both the supply and demand sides of the equation shift to the advantage of the oil exporters.
Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

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