The talk in the oil market the last few months has centered on two main stories: concerns over global economic growth and conflict in the Strait of Hormuz.
The first story suggests less oil demand (bearish), while the second story implies less oil supply (bullish). Taken together, this narrative has kept oil prices in a tight range.
On the days when headlines scream bad economic news, crude futures have dipped to the bottom end of the range, only to bounce back as tension remains high in the Persian Gulf between Iran and the US & Great Britain.
Oil prices plunged August 1 after President Trump announced on Twitter the US would slap 10% tariffs on $300 billion of Chinese goods starting September 1.
What’s missing from this conversation is fundamental data.
Global crude inventories are the best indicator of the supply-demand balance. Knowing this information helps ground the market in reality.
While the price action has revealed little, inventory data shows a trend.
Global crude inventories have fallen since mid-June, according to Ursa measurements. Total stocks have dropped five of the last six weeks, down 3.2% between June 13 and July 25.
A near real-time pulse on crude inventories is a new phenomenon, instead of relying on lagged government statistics.
Source: Ursa
The amount of oil in storage is at its lowest level since the end of March, our data shows.
This also means global crude inventories are slightly lower year-to-date, erasing the surplus that formed in April and May.
We can examine the data on a more granular basis. Which sites have been driving the change over the last six weeks?
Here’s a list of the top-ten draws, in absolute terms, over this time period:
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Vadinar (India)
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St. James (United States)
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Kharg Island (Iran)
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Zhoushan (China)
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Fujairah (UAE)
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Dalian (China)
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Louisiana Offshore Oil Port (United States)
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Ulsan (South Korea)
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Caofeidian (China)
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Weifang (China)
All the locations above rank high globally in terms of storage capacity. It’s not surprising they would move the needle.
You’ll also notice four of the ten sites are located in China. We highlighted the unusually strong refinery demand in China because of new mega-refineries.
We covered the impact of higher crude exports on LOOP storage levels, which is also likely behind the inventory draw at St. James, the oil hub about 60 miles upriver of New Orleans.
One place you wouldn’t expect crude inventories to be falling is Kharg Island, Iran’s main export terminal.
With the US clamping down on Iranian crude exports since May, storage tanks at Kharg Island began to fill up.
Even though inventories have dropped over the last six weeks, they remain quite high.
Going back to the big picture, why haven’t oil prices moved in response to falling global crude inventories?
Remember it often takes time for a broad consensus to form that underlying conditions have shifted by enough for oil prices to break higher or lower out of an established range.
A quick look at oil prices shows this moment hasn’t come to pass.
Crude futures have been trading sideways since June at approximately the midpoint between recent highs and lows.
Source: IntercontinentalExchange, CME Group via MarketView
The term structure for ICE Brent futures has been a different matter. Backwardation in the spread between front-month and second-month contracts has nearly disappeared.
Source: IntercontinentalExchange via MarketView
A term structure flirting with contango is a sign the scales are tilting toward oversupply.
That’s at odds with our data showing inventory draws over the last six weeks, though a delay in terms of market awareness and price response is normal.
For example, our research found a strong inverse correlation between Ursa crude inventory measurements in the Middle East and Brent prices with a six-week lag.
You can download the White Paper containing this finding (it’s free!).
That paper includes other examples of using Ursa’s satellite radar-based crude oil inventory data to predict movements in tradable instruments, including NYMEX WTI time spreads and financial use cases (e.g. single-name equities, exchange-traded funds).
(And if you’re interested in learning about its correlation to global equity indices, check out this White Paper).
Global crude inventories should also play a role in terms of OPEC production policy, as the group’s de facto leader, Saudi oil minister Khalid al-Falih, said the group needs to draw stocks lower before abandoning output caps.
What do you think? Where are oil prices are headed next? Could this inventory draw serve as a leading indicator?
