HardAssetsInvestor

Written by Sumit Roy  |

December 14, 2011

Crude Oil Report: Brent Plunges To 2-Month Low As Inventories Rise, Fundamentals Weaken

Details

The IEA's latest supply and demand forecasts were much more bearish than previous months.

The Department of Energy reported this morning that in the week ending December 9, 2011, U.S. crude oil inventories decreased by 1.9 million barrels, gasoline inventories increased by 3.8 million barrels, distillate inventories increased by 0.5 million barrels and total petroleum inventories increased by 2 million barrels.





Crude oil prices were down sharply after the latest figures, with Brent last trading at $105.06/bbl, while WTI traded at $94.46.

Brent is trading near the lowest levels since Oct. 7, though it is still technically above the $105 support level. A breakdown exposes the key $100 support level.

Over the past few weeks, the mood in the oil market has certainly changed. Inventories are back on the upswing relative to seasonal norms, thanks to rising production from Libya and Saudi Arabia, while demand in the developed world weakens amid the sovereign debt crisis in the eurozone. Demand in the U.S., for example, has been 5.6 percent below the year-ago level over the last four weeks, according to this week’s EIA report (discussed below). That’s a decline of almost 1 mmbbl/d.

Meanwhile, according to the latest figures from the International Energy Agency, OPEC crude production hit 30.68 mmbbl/d last month — the highest level in three years.

In its meeting today, OPEC lifted its official output quota to 30 mmbbl/d, but that was merely a symbolic gesture to close the gap between quotas and actual production.

In its latest Oil Market report, the IEA also cut its demand growth forecast for this year and next year to 89 mmbbl/d (+0.7 mmbbl/d year-over-year) and 90.3 mmbbl/d (+1.3 mmbbl/d year-over-year), respectively. Those figures are both down 0.2 mmbbl/d from the agency's prior forecast.

The IEA estimates that non-OPEC supply will have grown a mere 0.1 mmbbl/d this year — which is a large part of why the market was so tight this year. But the agency sees growth picking up to 1 mmbbl/d next year. The IEA forecast growth of 0.6 mmbbl/d for 2011 at this time last year, thus there is the potential for downward revisions (which are much more likely than upward revisions as non-OPEC supply has tended to disappoint).

Based on OPEC’s latest output of 30.68 mmbbl/d, global supply may exceed global demand by 480 kbbl/d next year, according to IEA figures.

That will help inventories — which are at depressed levels — recover. The agency said that OECD stocks of oil fell to 2.63 billion barrels in October, which is 61.9 million barrels below the five-year average.

Given these looser conditions in the oil market, it wouldn’t be surprising to see Brent edge toward the $100 level and potentially lower, should inventories continue to build rapidly.

Turning to this week’s EIA inventory figures, total petroleum inventories in the U.S. rose by 2 mmbbl, against the five-year average of a 9.5 mmbbl withdrawal. In turn, the inventory surplus grew to 17 mmbbl, or 1.6 percent.