In the current high interest rate and entrenched inflation environment the opposite of the “good news is bad news” adage also rings true. Whenever a disheartening set of economic data is released it ostensibly but almost inevitably raises hopes that the peak rates are close and ultimately the relentless rise in consumer prices will be reined in. There were three such reports yesterday. The first one showed that both the manufacturing and the services sectors kept contracting in September in the euro zone. The second one was the slowing growth of the US service sector; its index retreated from 54.5 in August to 53.6 last month. Most importantly, at least from the Fed’s point of view, the US private sector added 89,000 jobs in September, far below the expectations of an increase of 153,000. Both the euro zone and the US economies show signs of fatigue, at least based on yesterday’s figures, hence the fall in bond yields, the weakness in the dollar and the advance in equities yesterday.

Add to that the OPEC+ group decision to roll the quotas with the next meeting planned for November 26. Saudi Arabia and Russia both agreed to power ahead with their voluntary cuts until the end of the year revising the scheme on a monthly basis. Yet, the move down that started in the second half of last week not only continued yesterday but significantly accelerated.

One of the two major catalysts of the blood bath came from the supply side and the other one from demand. A Russian newspaper reported that the ban on diesel exports might be eased soon without elaborating, which, if accurate, could imply that the Russian government might re-focus from alleviating domestic shortage to maximizing exports revenues as the rouble has weakened below the 100 mark against the dollar. The second one was the unexpectedly steep rise in gasoline inventories, which was possibly the result of the 1 mbpd weekly decline in proxy demand. Nonetheless, crude oil stocks fell due to healthy exports suggesting resolute thirst from overseas. Whether the extent of the price fall, which took both crude oil contracts more than $5/bbl and Heat and RBOB around $7/bbl equivalent lower is justified is debatable. The question that must be asked is how “maybes” from a Russian newspaper on lifting the export ban and one set of weekly estimates on the volume of gasoline supplied by US refiners would materially change the 4Q oil balance in the light of the latest OPEC+ decision. Probably not, yet what seems clear is that a sustained break over the $100/bbl threshold will be a more onerous task than appointing the next speaker of the House of Representatives in the US Congress.

Historically Low Crude Oil Storage Utilization Rates

The mood in the oil market changes every now and again as the perpetual battle between macroeconomic considerations and the underlying solid fundamental backdrop ebbs and flows. The move up, which began at the beginning of July came to an abrupt halt last week, even though Saudi Arabia and Russia show no signs of back tracking on their production policies. Currently economic malaise is in the forefront of thinking and is the main price driver. The strong dollar, sluggish equity markets and rising bond yields are souring investor’s sentiment in energy.

Oil prices have dropped meaningfully since reaching the latest peaks. From the summits last Thursday WTI shed 12% of its value whilst Brent dropped 10%. Products, however, have come under much more immense pressure with Heating Oil diving 13% from the recent peak and RBOB plunging 19%. The CME 3-2-1 crack spread has lost more than $15/bbl since mid-September. Plummeting refining margins suggest that the rot is being led by weak products. Fears of overestimated demand naturally have a greater adverse impact in refined fuel than on crude oil, especially that the Saudi/Russian scheme is steaming ahead. This view obviously has justified merits, nonetheless, the weakening of the crack spreads is nearly as much attributable to relative crude oil strength than to product weakness.

On this side of the Atlantic the picture is broadly clear. The combined 1.3 mbpd output/export constraints create a tight market, something that is reflected in Brent CFD values. Dated Brent for next week was assessed $2.85/bbl over its forward peer last night and the $1.62/bbl backwardation in December/January Brent futures is also deemed robust by historic standards despite the considerable drop in flat price. The underlying crude oil strength in Europe inevitably permeates into the US, especially now that WTI Midland has become an integral part of the Brent crude oil basket. The US benchmark, nonetheless, is comparatively strong on its own right.

It is statistically evident that oil inventories and prices display an inverse relationship: the lower the former the higher the latter and vice versa. Whilst absolute stock levels irrefutably shape investors’ attitude and prices, actual usage of available stocks and storage is perhaps a more telling indicator. And from this respect the picture is equally, if not more constructive than outright stock levels imply.

As far as nationwide crude oil storage is concerned, what the EIA defines as the sum of working crude oil storage capacity and stocks in transit is over 815 million bbls. It has been expanding convincingly for the past 12 years. In March 2011 it was just above 531 million bbls. Commercial crude oil stockpiles, the latest weekly estimate showed, are 414 million bbls. It is just over half of the available capacity, the lowest in the past 12 years. In the first half 2016 crude oil stocks were filled up to 72% of their available capacity with the CME WTI structure firmly in contango.

Crude oil inventories at Cushing, Oklahoma, the CME delivery point, show the same but more extreme trend. At 22 million bbls storage is a mere 27% full. It is also the lowest reading of the past 12 years and a significant drop from 88% registered in the first half of 2017 when capacity was 79 million bbl, just under the current maximum and the front WTI contract traded at a discount to its longer-dated peers. The relative vigour of crude oil, which partly results from depleted inventories will plausibly persist unless stocks start getting filled up again, which might happen to a certain extent during the refinery maintenance period but given persistently high interest rates storing crude oil will remain economically unfeasible, consequently a prolonged and marked change in the current WTI structure is improbable.

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