Oil drops on US crude stocks build projection - Rystad Energy

Rystad Energy’s daily market comment from our Senior Oil Markets Analyst Louise Dickson

With OPEC+ reluctant to act and increase supply further amid the market tightness, the only downside to oil prices could come from inventory data this week – and that’s exactly what moved markets today.

While it does not reverse the overall bullish momentum going forward, the latest forecast by the API on swelling US crude stocks did take a toll on prices as traders moved to price in the unexpected size of the increase.

Despite today’s price cut, inventory news will not carry enough negative momentum to severely disrupt the otherwise bullish market fundamentals that seem to be keeping Brent on route towards hitting the $100 mark by year end.

The oil price trajectory remains bullish as natural gas prices continue their rally, a potentially cold winter awaits just around the corner, and oil demand continues to healthily outpace supply.

If the EIA data today also come in bearish, despite a short term price impact, the market should be able to maintain its bullish course, as overall demand for refined products in the US remains robust.

Rystad Energy estimates US road fuels demand in October stood at about 12 million bpd, compared to the average of 12.5 million bpd of road fuels consumed in the US in October 2019, before pandemic and lockdown effects took hold.

The still relative pocket of weakness in US demand remains in aviation, where demand for jet fuels has only recovered to 1.5 million bpd in October 2021, versus 1.9 million bpd in 2019.

In what usually is a “shoulder” season, the supply tightness in the US - both due to Hurricane Ida and the current dividends-focused upstream manta that discourages major production increases - has kept October tight.

With the holiday season around the corner, we expect continued tightness throughout November and December, even if this tightness isn’t always reflected in the crude inventory reports.

While the US is making major strides in reopening the economy and getting vaccines for children approved, other countries are falling into an autumn Covid-19 case spike, most notably Russia, and now there are a few reported cases in China that are prompting strict responses from the authorities, which poses downside risk for oil demand growth in the very near-term, and could provide a soft pressure on oil prices.