Oil Prices Fall Despite US Inventory Draw

Oil futures continued to wilt on Wednesday despite unchanged fundamentals and sizable draws in US petroleum stocks. In London, the October Brent contract lost 80¢ and settled at $68.23 per barrel, a far cry from its intraday high of $70.04 per barrel. In New York, the front-month Nymex West Texas Intermediate (WTI) September contract was down $1.13/bbl, ending the session at $65.46/bbl. Oil has been trending lower since the beginning of August, deflating the price curve and eroding the front-end time spreads. The first Brent futures time spread had narrowed to 48¢ on Wednesday, down from 95¢ on Jul. 29, the day before the ICE September Brent contract expired. Over the same period, the equivalent West Texas Intermediate (WTI) front spread was down from 64¢ to just 24¢. While the physical market was previously catching up with the derivative market, it is now the paper market that is bleeding strength. Combined net long speculative positions in Brent and WTI have slowly worn out in the past two months, from about 731 million barrels at the end of June to 566 million bbl last week, exchange data show. Steady Fundamentals Weaker technical signals have somehow revived the perception of wobbly fundamentals, and some of the most sophisticated traders may have already gotten out of the oil trades, sources said. Yet analysts are adamant that nothing has fundamentally changed since late July and that balances are in fact better now than they have been in the past 20 months. Gasoline and distillates remain relatively tight in terms of forward demand cover, and stronger margins are adding more buoyancy to the whole oil complex. Refining margins in Singapore are “decent,” traders said. European crack spreads are slowly recovering, even if diesel margins still struggle. In the US, gasoline and diesel are still commanding highly profitable double-digit crack spreads. “Once we see Covid numbers beginning to level off or decline, I’m guessing that’s when buying comes back into the market,” a source said. Supportive Draws Inventory draws are still expected to support the main oil benchmarks going into the fourth quarter of 2021. Data from the US Energy Information Administration (EIA) was rather supportive on Wednesday, reporting joint crude and distillate inventory draws. US crude stockpiles shed 3.2 million bbl in the week ended Aug. 13 to 435.5 million bbl, the lowest level since January 2020. Crude imports were down by 674,000 bbl. More importantly, a 1.3 million b/d increase in crude exports saved the day by concomitantly helping to drain stocks. Distillate inventories were also down by 2.7 million bbl last week to 137.8 million bbl, reverting the previous two weeks of stock gains. This was essentially the result of lower distillate output rather than a consumption uptick. Gasoline stockpiles increased by 700,000 bbl, with US implied gasoline losing 97,000 b/d to 9.3 million b/d. Back in April, the EIA expected US gasoline demand to peak at around 9.1 million b/d in August. But it eventually broke through 10 million b/d in early July and has been holding up well despite the surge of the Covid-19 Delta variant. However, the beginning of a shallow down trend over the past two weeks may signal peak US summer gasoline demand, especially as the US Labor Day holiday on Sep. 6 draws nearer, which usually marks the transition to winter-specification fuels. Julien Mathonniere, London