HardAssetsInvestor

July 25, 2012

Oil Stalls As US Production Increases 1 Mil Barrels Per Day To New High, But QE3 May Boost Prices

Details

U.S. inventories and production surged last week.

The Department of Energy reported this morning that in the week ending July 20, U.S. crude oil inventories increased by 2.7 million barrels, gasoline inventories increased by 4.1 million barrels, distillate inventories increased by 1.7 million barrels and total petroleum inventories increased by 10.1 million barrels.

Crude oil was lower after the latest inventory figures from the EIA. The report was decidedly bearish—U.S. inventories rose significantly and output in the country reached a fresh 13-year high.

In fact, U.S. crude oil output last week was 1 million barrels per day higher than the same week last year—a staggering jump that was unanticipated by most.

Still, supply and demand fundamentals seem to be following the International Energy Agency’s projections fairly closely. In its last Oil Market report, the agency said that it saw global supply outpacing global demand by 900 Kbbl/d in the second half of the year.

Rapidly rising inventories point to a well-supplied market. But as we wrote last week, the market is particularly vulnerable to supply disruptions amid extremely low levels of OPEC spare capacity.

Indeed, the nearly 1 million barrels per day of excess supply on the market can be readily absorbed by demand growth in the emerging markets over the next year. Likewise, a cut in output by Saudi Arabia could quickly balance the market.

In the interim, however, bulging stockpiles could keep upside in crude oil limited. Our short-term target for Brent remains $110, but we don’t see prices exceeding that level barring a strong bullish catalyst.

The most likely catalyst in the near term is the announcements of a third round of quantitative easing (QE3) from the U.S. Federal Reserve. That will put to rest some of the demand concerns that have been holding down the market and tighten the market faster than expected.

BRENT

WTI