Oil Prices Falter as US Crude Inventories Grow

Oil futures registered another big sell-off on Wednesday, hammered by the double-whammy of higher price volatility and a disappointing US inventories report. In London, the October Brent contract lost $2.03 and settled at $70.38 per barrel, nearly $2.50 below its intraday high of $72.83/bbl. In New York, the front-month Nymex West Texas Intermediate (WTI) September contract was down $2.41/bbl to end the session at $68.15/bbl after quickly falling through the $70/bbl floor. Volatile Times In the space of four days, the CBOE oil volatility index (OVX) has flared up from 32% to more than 41%, prompting a reshuffling among large index-tracking funds and volatility traders. Implied volatility in the Brent options market has also increased by about 4% in the past two days, showing that participants are pricing more downside risk in the short term. “Currently, the energy complex is a 'buy on the dips' and 'sell on the rise' type of market,” said PVM oil analyst Stephen Brennock. After tanking in early session, both Brent and WTI experienced a couple “dead-cat” bounces as investors either covered their shorts or bought the dip in the hope of later price consolidation. But that consolidation did not happen, and crude inventory data from the US Energy Information Administration (EIA) did little to alleviate the bearish market mood. Export Drag US crude inventories increased by 3.6 million barrels in the week ended Jul. 30 to 439.2 million bbl, representing the largest build since March. Tighter US Gulf-to-Midland crude differentials led to more transportation and oil movements from Midland to Cushing, Plains All American CCO Jeremy Goebbel said during the company’s recent second-quarter earnings call. But Cushing is not the culprit, as inventories there drew by 543,000 bbl in the past week to 34.9 million bbl, its lowest level since January 2020. Part of the problem is linked to lower US crude exports, which have halved since mid-July to just 1.9 million b/d last week. The narrowing price spread between Brent and WTI is choking arbitrage opportunities for US light oil, making it less competitive in Asia and Europe. With light, sweet oil from West Africa and the Mediterranean already struggling to clear in Europe, there is little room left for trans-Atlantic flows of US crude. Gasoline Drive On the flip side, US gasoline demand looks strong and remains the driving force in the US oil market. Gasoline stockpiles shed 5.3 million bbl to 228.9 million bbl last week, and US implied gasoline demand gained another 450,000 b/d to 9.77 million b/d. US crude refinery inputs averaged 15.9 million b/d last week, pushing average utilization rates to 91.3%. At 10.2 million b/d, gasoline output broke through the 10 million b/d mark for the second time this year. The summer driving season is also still going strong. With some restrictions still in place on international air travel, domestic holidays have fueled the appetite for road travel, boosting gasoline consumption. Distillate inventories decreased by 800,000 bbl to 138.7 million bbl, with output steady at about 4.9 million b/d, up 138,000 b/d from the prior week. But distillates are still clearly playing second fiddle in the current consumption drive, even though jet fuel demand climbed to 1.5 million b/d last week. Julien Mathonniere, London