U.S. petroleum inventories are well below their normal seasonal level and have continued sliding in recent weeks — supporting oil prices despite fears about the impact of omicron on the economy and travel.
The major statistical agencies all predict the global oil market will move into surplus from this month or next, but inventories will start building from an unusually low level, which is unlikely to put downward pressure on prices.
Total U.S. inventories of crude and products outside the strategic petroleum reserve are at the lowest seasonal level since 2014, according to weekly data from the U.S. Energy Information Administration.
In mid-December, the agency reported U.S. inventories are 79 million barrels (6%) below the five-year seasonal average for 2016-2020 and 59 million barrels (5%) below the pre-pandemic average for 2015-2019.
The deficit to the five-year average is in the 84th to 88th percentile for all weeks since 1995, depending on whether the pandemic year is included or excluded, showing stocks are relatively tight.
Commercial crude inventories are 26 million barrels (6%) below the pre-pandemic five-year average and at the lowest seasonal level since 2014.
Gasoline stocks are 10 million barrels (4%) below the pre-pandemic five-year average, also the lowest seasonal level since 2014.
Recent weekly reports show both crude and gasoline inventories remain under pressure, with no sign of rebuilding to eliminate the deficits.
Brent prices have steadied close to or slightly above the long-term average in real terms, and the futures market has stayed in backwardation, despite the resurgence of coronavirus infections and new travel curbs.
The backwardation in U.S. crude futures has been even stronger, and there are significantly more bullish hedge fund positions in the WTI contract, likely reflecting the low level of domestic inventories.
Even the promised release of 50 million barrels of crude from the strategic petroleum reserve has not changed this outlook much.
Given the currently depleted level of inventories, the market is likely to absorb both strategic sales and increased output from OPEC+ and U.S. shale producers relatively easily.
The major source of uncertainty stems from the new wave of the coronavirus pandemic and associated restrictions on international travel and domestic business activity.
The new wave is likely to delay a recovery in international passenger aviation from the first quarter into the second, by which time the buildup of immunity and seasonal changes should help reduce virus transmission.
Kemp is a London-based columnist for Reuters.
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