IEA: Gasoline Glut Could Cause Oil Price Rout

Yves here. We’re paying a bit more attention to the state of the energy market, since the inventory build in gasoline, which blindsided experts, is an indicator of economic softness.

By Charles Kennedy, a writer for OilPrice. Originally published at OilPrice

Oil prices have been crushed over the past two years because of a glut of production. With supplies falling off, particularly in the U.S. shale patch, prices have begun to firm up. But another glut that has built up and has stubbornly refused to fall threatens another oil price downturn.

In its July Oil Market Report, the International Energy Agency warned about shockingly high levels of refined products sitting in storage. Gasoline, diesel and heating oil are built up to such high levels in so many parts of the world, that a sharp rise in crude oil prices is unlikely in the short run.

The IEA said that “the fact that crude oil has in the past two months moved within a range in the high $40s/bbl should be a relief for some producers.” But it went on to caution that “the existence of very high oil stocks is a threat to the recent stability of oil prices.”i

The Paris-based energy agency cited one damning statistic: refinery runs in the first quarter of 2016 ran 60 percent higher than refined product demand growth. That has led to a buildup in inventories. The IEA said that “although stocks are close to topping out, they are at such elevated levels, especially for products for which demand growth is slackening, that they remain a major dampener on oil prices.”

Of course, as storage levels reach their limits and refiners begin to cut back on production, the pressure on storage facilities should ease. The flip side of that development is fewer refiners purchasing crude oil, leading to a fall in oil demand.

On cue, the U.S. Energy Information Administration released new weekly figures that backed up the IEA’s conclusions. The EIA found that for the week ending on July 8, gasoline stocks actually rose by 1.2 million barrels, and remain substantially higher than even the upper limit of the long-run average for this time of year.

The result? Crude oil prices are down sharply during midday trading today, with WTI down nearly 4 percent and Brent off by more than that amount.

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  1. Robert Hahl

    Perhaps the true purpose of financial austerity is to reduce oil consumption world wide.

    1. tegnost

      indeed perhaps, as our financial overlords have such clear benevolent foresight and care about people, not profits…or perhaps demand has never recovered from $4/gal gas in 2007 and it’s much simpier than that…but perhaps the $4/gal gas was done on purpose in order to kill demand and reduce oil consumption, first by high price and then by austerity, perhaps they just wanted to find out what price of gas (apparently $4/gal) would crash the economy so they could save the world through austerity, but first they wanted to get some money in the bank so they could survive his “austerity period” because their kids can’t take out student loans because they create an austerity rich environment that the children of the world benefit from but their kids were brought up right so they don’t need austerity to be good global citizens, or perhaps crows communicate through quantum vibration and that’s why we can’t understand the meanings in their throaty calls….

  2. rjs

    it’s not a demand side problem; it’s supply, which built up as refinery margins were near record highs and contango made it profitable to store products

  3. ambrit

    Local fuel prices show a more ‘nuanced,’ which is business speak for rent extraction oriented, situation. Sunday, we went to Laurel, a town some twenty miles north of Hattiesburg. The cheapest gasoline in Hattiesburg cost $1.99 per gallon. Laurel had gasoline selling for $1.76 per gallon, all over town, not in isolated pockets. This price disparity was consistent across brands and types of location. Laurel does not have it’s own refineries.
    The Oil business has a few rules of it’s own, which lowly consumers are not privy to.

    1. Isotope_C14

      Seeing as Hattiesburg is in the northern part of Forrest County, and Laurel is in Jones County, could the price disparity be a component of county taxes?

      Also, EPA requirements include a variety of fuel formulations depending on desired pollutant reduction in a given air-space. Some formulations are for reduced volatile organics and they may have varying prices.

    2. MLS

      day-to-day fuel prices are heavily influenced by all sorts of factors like local tax rates, the cost of operating any convenience store or auto service on premises (local ordinances regarding wages, for example), the volume of business they do, whether a particular city or county has a specific ordinance relating to gasoline formulations, the cost of transporting the fuel from refinery to the station (generally speaking farther = more expensive), and so on. That you’re seeing different prices 20 miles apart is not necessarily evidence of rent extraction.

  4. Chauncey Gardiner

    Puzzling that the price of ethanol, a lower btu and more corrosive fuel that is added to and blended with petroleum-based gasoline by refineries, has been maintained in a tight price range since late 2015 and is currently priced near its all-time highs. This while the price of gasoline has fallen. Why?

  5. NeqNeq

    Wasn’t there a post a few days ago which showed the US EIA’ weekly data was not lining up with actual monthly numbers? Meaning that there were large revisions being made to prior (2) month volumes?

    Why should last weeks EIA inventory numbers be considered as anything but a noisy estimate subject to lots of revisions?

      1. NeqNeq

        I get that. And I am sympathetic. That doesn’t change the fact that any prognostication (on the supplied info) is mood affiliation. Using your gut is fine. Hell, it might be instrumentally better than reasoned argument in certain situations. No need to claim its something other than your gut though. Unless, you are trying to sell something. Then its probably useful to engage in post-hoc rationalization.

  6. Pwelder

    Two points to remember about “glut” chatter in the Oil and Gas space:

    1) The IEA – and to a lesser extent, the EIA – work for governments of nations which are net importers of crude and products. These governments prefer low prices. This doesn’t mean that their published data is deliberately bad. It does mean that if there’s a number that lends itself to a bearish interpretation, they’ll make sure you know about it.

    2) One way to generate such numbers is to shift inventories from jurisdictions with low transparency on storage levels (e.g. the Persian Gulf) to jurisdictions where reporting is somewhat better (US, Western Europe.) The Saudis have been doing quite a bit of this, as part of their war on Iranian/Russian oil revenues. This will be coming to an end within a year or so, as realities of supply and demand overwhelm operations aimed at “painting the tape”.

    1. a different chris

      >The Saudis have been doing quite a bit of this

      Funny how oil has gotten so messed up – the major producers want to broadcast the fact that there is a glut. Ah Capitalism in all its contradictions…

      Something to point out to the goldish bugs – the people who just have to have currency attached to something physical, since gold is a hilarious currency anchor in this day and age* they have been switching to recommending oil as the baseline. Wonder how they will spin this?

      *think about explaining to an intelligent and even sympathetic-to-backed-currency alien, without any historical reference, why you would pick gold…

      1. Robert Hahl

        1. Gold is inert and can be easily purified, you can bury it when barbarians are at the gate.

        2. It looks good on women.

  7. Gil Gober

    In the US, domestic exploration and the number of active drilling rigs were cut dramatically. In late 1985, there were nearly 2,300 rigs drilling wells in the USA; a year later, there were barely 1,000. By September 30, 1981, petroleum prices were to be determined by the free market. This process was accelerated by President Reagan through an Executive Order

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