HardAssetsInvestor

Written by Sumit Roy  |

March 28, 2012

Crude Oil Report: Despite Surge In Inventories, Calls For End Of Oil’s Bull Run May Be Premature

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Until various supply disruptions resolve themselves, downside is limited.

The Department of Energy reported this morning that in the week ending March 23, U.S. crude oil inventories increased by 7.1 million barrels, gasoline inventories decreased by 3.5 million barrels, distillate inventories decreased by 0.7 million barrels and total petroleum inventories increased by 6.3 million barrels.

Crude oil prices fell sharply after the release of the latest inventory figures, with Brent last trading near $124, while WTI traded near $105.

Prices are clearly locked in a range. Brent has been fluctuating between $121 and $127, while WTI has fluctuated between $104 and $110.

BRENT

WTI

With inventories rapidly climbing (see charts on the following pages), some traders are beginning to speculate that oil’s range will resolve itself to the downside.

Along with rising inventories, weak demand in developed economies and the threat of a potential release of strategic reserves by governments have also acted to contain prices.

On the other hand, as we’ve written about extensively, a series of supply disruptions around the globe have acted as support for prices.

Hopes that South Sudan and Sudan could soon resolve their transit dispute were dashed after intense clashes between the countries’ respective armies on Tuesday. Approximately 350 Kbbl/d of oil remains offline in South Sudan due to its dispute with Sudan over oil transportation costs.

Disruptions in Syria and Yemen amid political strife in those countries are also reducing production by about 150Kbbl/d each.

Meanwhile, the impact of the EU’s embargo of Iranian oil is starting to be felt. Industry consultant Petrologistics estimates that Iranian exports fell by 300 Kbbl/d this month, the first major decline since the EU’s latest sanctions went into effect.

The full impact of the West’s sanctions on Iran will be felt starting in July, the deadline for EU members to secure alternative sources of oil. Until then, and until the various disruptions in other countries resolve themselves, expect downside for oil prices to be limited.