Oil markets are once again in the doldrums amid fears of a persistent oversupply and concerns over the slow drawdown in U.S. inventories, but oil experts say those concerns are overdone.
“We are at the start of the rebalancing, we haven’t finished it yet, whereas the market almost priced in that everything was done but now it’s gone almost the other way, saying that no rebalancing has been done whatsoever,” Amrita Sen, the co-founder and chief oil analyst at Energy Aspects, told CNBC Wednesday.
Oil prices remained subdued on Wednesday with U.S. crude below $40 per barrel and Brent under $42 a barrel amid continued concerns over an oversupply of oil, although prices did receive some support from a weaker dollar, Reuters reported.
Analysts expect prices to continue to be under pressure from rising supplies, high crude inventories and an uncertain demand outlook. But Sen said that markets had overestimated how quickly the glut in oil supply could clear and were being impatient.
“It’s not that the rebalancing isn’t happening, of course it is happening, but we also have a huge amount of inventory overhang that needs to be run down …. a lot of people have been disappointed at the pace of inventory drawdown,” she said.
Sen also noted that inventory data could be misleading because there was a lot of oil floating on water (oil held in floating storage at sea) that was being offloaded but was not being captured by official inventory weekly statistics, such as those put out by the U.S. Department of Energy’s energy information administration.
“If anything,” she added, “when oil on water is discharged on land, it makes the inventory on land look even bigger and I think this is where part of the problem lies.”
Nonetheless, Sen said the rebalancing motion was “very much in motion.”
“We are dropping supplies like a stone, non-OPEC supplies have fallen by over a million barrels per day over the last three to four months and it just takes time. The market always wants things very quickly,” she added.
All important inventories
Oil markets on Wednesday are focused on the U.S. Energy Information Administration’s usual weekly look at oil inventories with the data due at 10:30 a.m. ET. Figures from industry group API late Tuesday showed an in-line stockpile reduction of 1.3 million barrels.
Markets have become somewhat obsessed with analyzing the figures for signs of a rebalancing in supply and demand.
Last week, U.S. crude futures fell more than 2 percent after the EIA reported an unexpected rise in crude and gasoline inventories. It said last Wednesday that U.S. commercial crude in storage rose by 1.7 million barrels to a total of 521.1 million barrels in the week through July 22. Analysts had expected a draw of 2.3 million barrels.
Like Energy Aspect’s Sen, Stephane Foucaud, managing director of institutional research at FirstEnergy Capital, told CNBC on Wednesday that the U.S. inventory levels were misleading.
“At the moment, all eyes are focused on the inventory level in the U.S. and I think that although market participants expected the inventory level to go down a lot, they have gone down but perhaps not as much as people expected, and as a result it’s all about a glut, an oversupply and so forth but I think the data is perhaps a bit partial – one of the reasons that the inventory has not gone down as far as expected is because the U.S. has imported a lot,” she said.
Foucaud said that other data seemed to suggest that the market was actually “already balanced.”
“Also we do not have a picture of the overall inventory level around the world so it’ll be interesting when we get that data. I should think that we are currently selling more than we produce and that as a result, the demand is perhaps higher than production so the market I think is already balanced.”
Sen and Foucaud are not alone in believing that oil market sentiment is over-bearish with both Citi and Standard Chartered issuing reports stating that there was no justification for the recent oil price declines.
Not everyone was in agreement with the experts, however, and Peter Toogood, investment director at City Financial Investment Company, offered an investor’s perspective on the oil price, telling CNBC Wednesday that the glut of oil “is massive and the usage is not in the zone where you want it to be.”