US crude oil inventories continued to swell last week, rising by an additional 2.3 million barrels (mmbbl) to 534.8 mmbbl, leaving inventory levels near highs not seen in the past 86 years.
The chart below, supplied by CBA’s mining and energy commodities analyst Vivek Dhar, tells the story. While we’ve seen similar before, it’s clear that the US is awash with crude at present.
“Days of crude oil supply increased to 33.4 days last week and sits 7.17 days above the six-year average (2010-15) for this time of year,” said Dhar in a research note released on Thursday.
“While this difference is below peaks achieved last week, it still highlights the extent of oversupply in crude oil markets.”
With crude inventories near all-time records, higher prices encouraging marginal producers to restart production and increased output from Iran still to arrive, Dhar suggests that the crude price may have to retest its previous lows in order to balance the market.
“We believe US oil production may have to fall further in order to balance crude oil markets, meaning prices between US$25-35/bbl may return to force US crude oil producers to exit,” he says.
“For now, financial markets should add volatility to crude oil prices as investors weigh the likelihood of the US Fed lifting interest rates as global growth concerns increase. A slower rate rise should support crude oil prices more than otherwise.
“Physical markets will likely continue to weigh on crude oil prices in 1H16 as crude oil output increases from OPEC nations, particularly Iran.”