HardAssetsInvestor

Written by Sumit Roy  |

June 20, 2012

Oil Plunges As Inventories Climb To Highest Level Since 1990, US Production Spike Continues

Details

U.S. oil output continues to surge, sending inventories to fresh highs and prices to new lows.

The Department of Energy reported this morning that in the week ending June 15, U.S. crude oil inventories increased by 2.9 million barrels, gasoline inventories increased by 0.9 million barrels, distillate inventories increased by 1.2 million barrels and total petroleum inventories increased by 11.1 million barrels.

Crude oil prices plunged after the release of the latest figures. Brent hit a fresh 18-month low below $93, while WTI held near 8-month lows close to $81.

Oil has underperformed significantly over the past few weeks. Despite a rebound in most asset prices in the period, crude has actually moved in the opposite direction, as Brent fell to yet another new low today.

The decline is taking place in the face of another ostensibly bullish event—a sharp drop in Iranian exports. With the European Union’s embargo on Iranian crude going into full effect in July, exports from that country have fallen sharply as customers sought alternative sources.

One trader said that Iranian crude exports in June may have fallen as low as 1.2 mmbbl/d, down 1 mmbbl/d from last year.

Yet, as far as short-term oil prices are concerned, the Iranian story has come and gone. Of course, we saw Brent rally to multi-year highs above $128 earlier this year on the prospect of this lost Iranian supply.

But now, sentiment has reversed amid growing evidence that the market may actually be oversupplied. Enormous increases in output from Saudi Arabia, Iraq and the United States have more than offset the loss of exports from Iran.

Indeed, U.S. crude inventories reached the highest level since 1990 last week. Additionally, the surge in U.S. production continues to be relentless. Output hit 6.353 mmbbl/d last week, up a whopping 700K bbl/d from the same week a year ago.

Crude production in the U.S. hasn’t been this high since 1999.

In our view, all signs point to continued downside for oil prices until OPEC (particularly, Saudi Arabia) cuts production meaningfully. Our initial objective for Brent is between $85 and $90.

BRENT

WTI

Turning to this week’s EIA inventory figures, total petroleum inventories in the U.S. rose by 11.1 mmbbl, against the five-year average of a 3.4 mmbbl increase. In turn, the inventory surplus rose to 47.4 mmbbl, or 4.5 percent.