An inverted US Treasury bond yield curve. China’s industrial growth at a 17-year low. Negative German GDP growth.
These headlines have roused fears the global economy is slipping into recession.
This backdrop has also weighed heavily on commodities, with some forecasters lowering their projections for oil demand growth.
Oil prices have followed daily movements in broader financial markets, plunging when “risk-off” sentiment dominates and rebounding when risk appetite returns.
As if this wasn’t enough to digest, oil traders are grappling with the tense situation in the Persian Gulf, where Tehran is warning Washington that efforts to drive Iran’s oil exports to zero will have security repercussions in the strategic Strait of Hormuz.
Source: NYMEX, ICE via MarketView
Where does this leave oil market fundamentals amid a focus on macro events?
The best barometer for changes in the supply-demand balance is whether shifts can be detected in crude storage levels.
Ursa measurements of global crude inventories reveal a surprising statistic. Despite all the attention on the weakening economy, any cracks in terms of oil demand are not yet visible.
Our data shows the opposite of what you might expect. The amount of crude in storage has actually been falling recently.
Source: Ursa
A downturn in the economy would likely result in a slowdown in oil consumption, which translates into less refinery runs causing crude demand to slow and inventories to build.
This could still happen, but so far, the oil market hasn’t proved to be a leading indicator of bearish economic conditions.
That could be one reason why oil futures have retained a semblance of strength.
Even though front-month contracts are trading far below highs from earlier this year, the term structures for ICE Brent and NYMEX crude are backwardated.
When the oil futures curve is downward sloping (i.e. backwardated), that’s a reliable sign that market fundamentals are pretty tight.
The graph below shows the spread between the front-month and second-month contracts. A positive number denotes backwardation and negative equals contango.
Source: NYMEX, ICE via MarketView
The other thing that’s notable is the recent move in WTI term structure, closing the gap with Brent in terms of structure and flat price.
That’s been visible in the second-third month spread:
Source: NYMEX, ICE via MarketView
What’s behind this momentum? Inventories at Cushing, Oklahoma have been falling this summer as refinery utilization rises and pipeline congestion eases.
That last point marks a shift in dynamics between the Permian Basin, Cushing & Gulf Coast, which for years has been defined by inadequate pipeline takeaway capacity.
The start-up of the Cactus II Pipeline was the first of three pipelines that will expand pipeline capacity by 2.5 million barrels per day.
We’ve been monitoring construction progress on all three pipelines (Cactus II, Gray Oak, EPIC) using satellite imagery and providing regular updates to clients.
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The ability to move more crude out of the Permian Basin also means more supply arriving in the Gulf Coast to be exported.
In a recent blog, we looked at how strong exports have been lowering crude inventories on the Gulf Coast, primarily at storage tanks away from refineries.
This raises an important question, however. Can the rest of the world absorb this growing supply of oil? Is demand sufficient?
The explosion of US shale production was a major reason why oil prices collapsed beginning in 2014.
The lifting of legal restrictions against US exports and building of more pipelines gives US producers an outlet abroad.
That may prevent another build-up at home, but the math remains the same. If demand isn’t strong enough, then storage levels will rise. Just the locations will be different.
In coming weeks and months, we’ll be discussing whether our global measurements at key inventory sites shows signs of oversupply.
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