After two days of drops occasioned by the Brexit vote, oil prices rebounded on Tuesday and Wednesday as trader concerns shifted to supply and demand issues once again. While Britain’s departure from the EU may eventually lead to weaker demand for oil products, this is now seen to be years away. On Wednesday oil prices made their largest one-day gain since early April after the EIA reported that US crude stocks last week had fallen by 4.1 million barrels, about twice what analysts were expecting. An oil workers’ strike in Norway could start on Saturday closing in about 300,000 b/d of the country’s oil production.
The EIA also reported a large decline at the Cushing storage depot; however, US gasoline stocks climbed by an unseasonable 1.4 million barrels. At the close, US oil futures were up by $2.03 or 4.2 percent for the day to close at $49.88. London too was higher, closing above the psychological $50 level at $50.61.
Some traders were not impressed by the drop in US crude stocks given the time of the year. US shale oil production is dropping; the effect of the Alberta outages is only now having a full impact on US crude stocks; US refining is running at 16.7 million b/d, suggesting that the decline in stocks should be larger than we have seen of late. If this situation does not change in the next month or so when gasoline production for the US’s summer driving season starts slowing, we might see record amounts of crude in storage again.
The US may be one of the only places left to store excess crude. Europe has suffered from recent refining strikes and storage tanks there are reported at capacity. This is also true in Asia where large Chinese refining runs have left unusual surpluses of gasoline and diesel stocks. One tanker load of Asian gasoline was even shipped to the US, which has not happened in living memory.
With Brexit fears put aside for the minute, attention is focusing on supply outages and the pace at which the world oil market is rebalancing. The 1 million b/d outage due to the Alberta fires is slowly coming to an end and should be over by Labor Day. The possible oil workers’ strike in Norway is unlikely to be long-lived, and the “ceasefire” in Nigeria seems to be holding.
The situation in Venezuela, however, is a major threat to the world’s oil supply. So far there have been no reports of a major decline in Caracas’s oil production, but the oil service companies which are owed some $2 billion in back payments have announced reductions in operations. Some US companies have been supporting the Venezuelan oil industry for nearly 100 years. What little food left in the country is going to those with lots of money, political clout, or guns, and widespread starvation is likely unless there is massive foreign intervention with relief supplies in the next few weeks. A societal collapse in Venezuela is likely to be more serious and longer lasting.
The country has been producing about 2.3 million b/d. The government and national oil company are keeping quiet about the current situation amidst fears that the country will default on its bond payments in the 4th quarter when some $4 billion comes due. A loss of a large part of the country’s oil production would obviously have a serious impact on the global oil supply and move prices higher.
