Oil Supply Near 20-Year High

Oil Inventories Highest Since 1990

In its weekly status report today, the Energy Information Administration (EIA) reported another build in crude oil inventories. At current levels, crude oil stockpiles remain significantly above seasonal and historical levels. In fact, at 366.7 million barrels, current crude oil inventories are at their highest point since 1990.

But despite the continued growth in oil inventories, oil prices have held up fairly well in the $50 per barrel vicinity. This reflects growing optimism about the emerging `green shoots’ on the economic landscape. It is perhaps not unreasonable to state that the commodity’s day-to-day price movement lately has been influenced more by the performance of the equity markets than its own supply-demand dynamics.

While we continue to advocate some defensive positioning in the group through Exxon (XOM) and Chevron (CVX), we are getting more comfortable with building positions in the deepwater drillers, such as Transocean (RIG) and Pride (PDE), and Schlumberger (SLB), the global oilfield service franchise.

The agency reported that total commercial crude oil stocks increased by 5.6 million barrels from the preceding week, significantly above expectations. Current stocks are 16.9% above the year-earlier level and remain above the upper limit of the average for this time of the year, as evident from the nearby chart from the EIA. The supply cover increased from the previous week to 25.9 days of supply, significantly above the year-earlier level of 22 days.

The agency reported a mixed picture for refined products, with a greater than expected draw-down in gasoline stocks. Continuing with the recent trend, stocks at Cushing, Oklahoma, the delivery point for NYMEX contracts, dropped by 800,000 barrels. Stocks at this critical delivery point peaked in February and have dropped in eight of the last nine weeks.

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