U.S. oil demand may drive crude inventories to historical lows

Cushing, OK crude terminal

(Bloomberg) --Crude oil inventories in America’s largest storage hub could fall to historically low levels by the end of September as the demand rebound continues to outpace production.

Stockpiles in Cushing, Oklahoma, the delivery point for West Texas Intermediate oil futures fell nearly 4 million barrels in the last two weeks, bringing inventories to the lowest since March of 2020 when the pandemic forced the country into lockdown. Analysts are estimating and traders are betting that supplies could dwindle to seasonal levels not seen since 2018 by the end of September.

Inventory levels at the massive complex, which houses crude oil produced across West Texas, the Midwest and western Canada, arguably has more sway over oil prices than anywhere else in world. With U.S. shale production still 15% off of its pre-pandemic peak and imports from Canada running low there is a growing consensus among trading house and Big Oil executives that prices are set to surge as supplies tighten.

Stockpiles at Cushing, currently at 41.7 million barrels, could drop to the lowest in almost 3 years as refineries ramp up fuel-making and oil production is still lagging, said Chris Sloan, a Houston-based analyst with BB Energy Trading Ltd. Inventories could fall to the 30-million-barrel range in the next three months, he said.

It’s a stark reversal from a year ago when a market price crash devastated the oil industry as demand slid from pandemic-fueled restrictions. It forced traders to stuff unwanted crude into storage globally until consumption improved, shifting the market to a steep contango where oil for immediate delivery trades at a discount to forward supply.

At the heart of the decline is a lack of a type of oil called Domestic Sweet or DSW that is produced by blending a cocktail of crudes, including supplies from the Permian and the Midwest, according to market participants. Output recovery in the Midwest, where Cushing tanks sit, has been the slowest among all producing regions.

“The lack of available DSW is undoubtedly tightening WTI–spec balances at the hub,” according to a note from consultants Energy Aspects. This and strong exit flows could push Cushing stocks in August and September to around 27 million barrels and 24 million barrels, respectively, they said.

Three basins that may be contributing to tightening DSW blendstock are the Niobrara, Eagle Ford and Bakken, said Elisabeth Murphy, ESAI Energy LLC upstream analyst for North America. “Our forecast indicates an annual decline of about 90,000 barrels a day for Bakken, about 130,000 barrels a day for Eagle Ford and about 120,000 barrels day for for Niobrara this year,” she added.

The steep backwardation of the oil market is also driving the inventory drawdown. When barrels for prompt delivery fetch much higher prices than those marked for the future delivery, traders and producers are motivated to sell product.

“I think that Cushing stocks will decline to minimum operating levels of 32 million to 34 million by the end of July,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston.

Still, some traders note that rising WTI prices relative to Brent have curbed exports. They also note that high prices and high inventories of gasoline and diesel will dent domestic demand. Last week, U.S. refinery crude processing rates fell for the first time since early May, according to government data.