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Why Crude Stock Levels Are Not Signaling Hope for Oil Bulls

WTI is priced at Cushing, Oklahoma, which is a closely watched storage hub and can be an indicator of where domestic oil prices trend. Currently, inventory levels at Cushing are near operational lows, which has historically correlated with higher WTI pricing. However, WTI pricing has been resistant to reflect this market tightness, as prices have averaged $83/bbl since July 2023, when inventories started to decline. The recent bounce in oil prices looks to be tied to geopolitical developments rather than supply/demand and inventory data, with fundamentals potentially less a part of the story near-term.

As seen in the graphic below, the WTI price and stock levels at Cushing have largely moved inversely over time. Recent examples of this can be seen when COVID-19 lockdowns came into effect in 2020 and when the EU banned imports of Russian crude oil in December 2022. Inventories hit 21.3 MMbbls in June 2022 in the lead up to the ban, and the WTI price reached $122/bbl. This time around, inventories are even below June 2022 levels, yet WTI is not fulling reflecting low inventory as fundamentals would suggest.

Why might all of this matter? Low storage appears to be a function of an increase in crude exports and higher refining utilization rates, which held steady above 90% from April to mid-September. While autumn refinery maintenance has started, and utilization has been down the last few weeks as a result, this has not led to significant upward movements in stock levels at Cushing. Also, crude exports are above the five-year average of 3.1 MMb/d, averaging 4.1 MMb/d so far in 2023. This increase in exports corresponds with tighter supply globally, as OPEC+ has curbed production despite demand forecasts still showing growth.

Unlike in 2022, the price of WTI is below where BTU Analytics currently calculates it could be, pointing to a disconnect between price and fundamentals. As stated earlier, the price of WTI did move up in September when Cushing stocks first moved below 22 MMbbls, but corrected and increased, albeit temporarily, following the conflict in Israel that began on October 7, 2023. If comparing the price point for WTI to when the EU banned Russian crude, at current Cushing storage levels, and running a simple correlation exercise, WTI should be trading closer to $105/bbl. On October 25, 2023, the EIA reported a 213 Mbbl build at Cushing, likely due to reported outages at the Osage and Cushing South pipelines, which also limited export opportunities. Nine of the last 11 weeks have seen draws in Cushing inventories, and refining utilization is still down, likely due to maintenance. All of this points to inventory levels remaining close to operational minimums for the near-term. So, whether the market returns to fundamentals-driven behavior remains to be seen, but, so far, there are no strong indicators for such a move near-term.

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Mitch is an Energy Analyst at BTU Analytics, a FactSet Company, primarily focused on oil and gas market data and analysis. He previously worked as a sell-side equity analyst covering Russian oil and gas names.

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