Oil inventory data published by the US Energy Information Administration (EIA) earlier this week shows clearly that there is downside risk to the current oil price. The data showed total stocks of oil and oil related products at an all time high of 1,873m barrels. Whatsmore the US produced 9.3m barrels of oil per day for the week ending February 27, which is the highest level of weekly production in over 40 years. This means that US oil production growth is still running north of 1m barrels a day year on year and that despite significant decreases in oil rig count (below 1,000 for the first time since June 2011, according to data published by Baker Hughes Inc).
In addition, it increasingly looks likely that an agreement will be found with Iran this month on its nuclear program. If a deal is forthcomng then this could lead to an extra 0.5m barrels of oil coming on to the world oil markets every day, and the reality is that global production is not slowing down at a fast enough rate. According to data published by the IEA global supplies only fell by 235,000 barrels a day in January to 94.1m barrels a day.
What will bring the oil price down is a decrease in production (which we are not seeing), a substantial increase in global demand (which we are also not seeing) or reductions in oil inventories (which we are definitely not seeing). With regards the latter the big question is how much spare capacity there is in the market. According to the EIA US capacity utilization is currently at 60% up from 48% at this time last year, so there seems to be lots of spare capacity oil storage capacity in the U.S. But storing oil costs money and at some point that oil will come on the market, and as it does oil prices will fall…and my own view is that we will test the recent $44 lows for WTI crude oil over the next weeks…low prices is the only way to take excess supply out of the market.