Recent Build in US Crude Oil Inventories is Bearish on the Surface, But There is a Silver Lining....

This past week, the US Energy Information Administration (EIA) reported that US crude oil inventories rose by 3-million-barrels for the week of February 23rd. Analysts had expected the EIA to report a 1.2-million-barrel build in crude oil inventories, so the actual figure was viewed as bearish. Further, Gasoline stockpiles were also up, by 2.5 million barrels vs. a 300,000-barrel build in the previous week. While the recent build in inventories is bearish on the surface, one has to look at the bigger picture to really understand the current US inventory situation. Overall, since hitting a record high of 540 million barrels in 2016, US storage levels have steadily declined to around 420 million barrels (just slightly above the 5-year average). Interestingly, the last time storage levels were at the 5-year average in late November 2014, the WTI price was around $72.50 per barrel (vs. the current price of $61.25 per barrel).

Looking forward, as we head into the busy US summer driving season, crude inventories typically decline at the beginning of June through mid- to late-July (before beginning to increase again in August). Also, with OPEC (and Russia) likely maintaining its production cuts through 2018 and global demand for oil expected to add 1.7-2.0 million bpd this year over 2017, there is a clear path for US inventories to drop well below the 5-year average. Should inventories drop below the 5-year average, this would be a very bullish sign for gasoline and oil prices. The one fly in the ointment is increasing US oil production (currently at 10.27 million bpd), however, it is our belief that the rate of increase will not be enough to offset the OPEC cuts and rising global oil demand. Therefore, should US crude oil inventories drop below the 5-years average, we believe a $70-$80 WTI price is very likely later this year.