Low inventories reported today by the Energy Information Administration (EIA) did nothing to staunch the bleeding, with WTI getting gutted nearly 4% on the day, and Saudi rumors throwing another spanner in the works, while new U.S. economic data suggests more pain is in store for the sector.
Three weeks ago, eight OPEC+ countries unveiled plans to phase-out their voluntary oil output cuts by ramping up output in May by 411,000 barrels per day–equivalent to three monthly increments. The announcement came at a time when U.S. President Donald Trump announced tariffs on more than 90 countries across the globe, roiling oil markets. The eight OPEC+ countries are due to meet on 5 May to discuss production levels for June, just days after Washington released a worrying economic report. The U.S. economy shrank at an annualized 0.3% clip in the first quarter, marking the first contraction in three years, due to surging imports as companies rushed to stock up before Trump’s 90-day pause on elevated tariffs comes to an end. That’s a sharp turnaround in fortunes compared to the final quarter of 2024 when the economy expanded by 2.4%.
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Further, reports on Wednesday indicated that Saudi Arabia is planning to push for increased production during the May 5th meeting, and it will most likely get its way, with Riyadh reportedly saying it could easily sustain lower oil prices for a longer period.
And now commodity analysts at Standard Chartered have predicted the weakness in oil markets is likely to persist thanks to U.S. tariff policy despite oil inventories remaining low.
According to the latest weekly report by the Energy Information Administration (EIA), U.S. oil inventories remain low, with the deficit in combined U.S. crude oil, distillate and gasoline inventories below the five-year average widening to 47.4 million barrels (mb). The deficit has now more than doubled over the past three weeks to the widest in 20 months. StanChart’s proprietary U.S. oil data bull-bear index is currently ‘highly bullish’ (i.e., in the strongest 15% of all data releases since 2013)–for three weeks in a row. StanChart notes that the last time a run of data was this strong was in early 2022, helped by strong tailwinds from pandemic recovery. Whereas complete OECD inventory data comes with more of a lag, the International Energy Agency (IEA) has noted that February was the sixth consecutive month of draws, with inventories at their lowest since September 2022.
Tight prompt conditions are also evident in oil futures markets, with Brent spreads remaining firmly backwardated for all but brief periods over the past year.
StanChart notes that oil-price swings lower normally start from a position of oversupply and rising inventories; however, the fact that the current weakness has coincided with low and falling inventories is a strong signal that the oil market thinks U.S. economic policy coupled with Iraqi and Kazakh supply policy are both potentially unusually disruptive events for medium-term balances. Previously, we reported that Kazakhstan’s crude output hit a record high of 2.12 million barrels per day in February, good for a large 13% increase from January volumes and well above its OPEC+ quota of 1.468 million bpd. For the May meeting, StanChart says the default option is to proceed as per the schedule with a single month’s increment (about 138 kb/d). However, StanChart says a further acceleration in output is warranted, with low inventories leaving scope to add to short-term supply.
Whereas the latest Kazakh compensation schedule is more front-loaded than the previous one with the total amount of compensation 43% higher, the commodity experts note that the challenge for Kazakhstan so far has been to deliver any compensation at all. Kazakh government statements over the past week have varied from stating that cuts are impossible to saying that they are still policy. It’s highly doubtful that Kazakhstan has yet managed to rebuild sufficient trust from its partners in the OPEC+ eight, leaving the option of accelerated production increases very much on the table.
Meanwhile, the European Union has kicked off the injection season on a strong footing, with gas inventories rising faster than last year for the past 11 days and even faster than the five-year average on 13 of the past 16 days. According to Gas Infrastructure Europe (GIE) data, EU gas inventories clocked in at 44.72 billion cubic metres (bcm) on 27 April, with the w/w build of 1.9 bcm being 25% more than the five-year average build.
However, inventories are now 26.67 bcm lower y/y and 11.68 bcm below the five-year average. Europe’s gas storage is currently at 38.4% full, much lower than 61% at this time last year. Europe’s gas prices have continued falling, with natural gas futures falling below €32 per megawatt hour, near a nine-month low.
By Alex Kimani for Oilprice.com
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