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Inventory Trap

Crude oil In USA the Commercial Petroleum inventories (products +crude), excluding SPR( Strategic Petroleum Reserve ) stands now (July 2016) at the staggering level of 1,356,709, 000 barrels compared to 1,096,896,000 in 2014 that is almost 260 million barrels of extra petroleum piled-up as the result of the crude oil price collapse since 2014 in the hope of a price revival at later stage which never came..we called it in 2014 “ “ Waiting for Goddot bearing in mind that holding inventories carries high cost . ( like rent, financial cost, opportunity cost).

Most of the increase was due to built up of crude oil which jumped from 374 million barrels in 2014 to 521 now in July 2016.While inventories of products increased and piled-up as refiners had to process part of the extra crude, leading to more costly inventories in the refineries of 835 million barrels of Products compare to 721 million barrels in 2014

The Contango TrapThese figures are not the new normal, they have to drop by at least 20% for the market to return to normality. However, in a glutted marketed a washed with all sorts of energy sources, and in a situation of world economic recession we are can conclude :

1-These inventories have laid a floor under crude oil prices estimated at ( $35 ) below which the refiners are not ready to dump these trapped quantities , even if the producer reduced prices below $30 ….

2-These inventory quantities have capped not only crude oil prices but also formed a ceiling on increases in petroleum inventories , due to shortage of storage tank even under drastic fall in crude oil prices.

Crude oil Conclusion: Trapped Inventories The crude oil prices are heading towards $35 and should continue to fluctuate between The present level of $50 and the $30. This is because neither the sellers of crude oil nor the buyers ( the holders of inventories ) have any interest in low prices , as both stand to lose equally under any price collapse , . However, the market speculators are not exempted from this they have lost a lot of leverage as the corridor for speculation is narrowing down as a result large inventory built up in Cushing the delivery point for WTI on Futures Market,

The Inventory level in Cushion was only 40 Million Barrels in 2014, now it stands at 65 Million Barrels . Granted , the volume of trading has increased on Nymex futures market has increased to almost 1.5 million contract per day , which requires high Crude oil inventory, this by itself became an obstacle for the speculators to manipulate the price on the futures market because the liquidity required for this is also too high

Also, because there are ample supplies of crude at Cushing, and no inventory holder is willing to go below the floor , and all sellers and buyers are ready to supply as soon as the price exceeds the ceiling… exception to the rule are the Wednesday Window, the Friday data releases etc…these have only a duration of few hours (hick-up) before the market returning to the actual trend path

Jabbar al-Jaf:Oil Market Analyst