Oil Market Update: U.S. Crude Oil Stocks Fall Sharply

Today, the U.S. Energy Information Administration (EIA) reported that U.S. crude oil inventories plunged 8.4 million barrels to 343.6 million barrels for the four-week period ended August 14.

Overall, the decline in inventories is in line with expectations laid out in the August 6 blog entry. Highlights from that entry were:

U.S. oil consumption has continued to follow broad seasonal patterns albeit with a noticeably sharper falloff between winter heating season and the summer driving season.

If one transposes this year’s trends relative to the 10-year base, the recent uptick in oil inventories was not too surprising. However, assuming that this year’s dynamics remain relatively constant, oil inventories are not likely to rise significantly in coming weeks. Instead, the more normal pattern of falling inventories until sometime in mid- to late-September should resume.

The dynamics that have prevailed so far this year would suggest an initial peak near 350 million barrels before a fresh decline in inventories commences.

Aside from rising oil consumption (now 18.995 million barrels per day, the highest figure since the four-week period ended March 20, 2009 when consumption averaged 19.112 million barrels per day), a substantial drop in oil imports likely produced the sharp decline in inventories. The four-week period ended August 14, saw imports average 9.662 million barrels per day. The prior four-week period had average daily imports of 10.087 million barrels.

Overall, my thinking remains essentially unchanged from August 6. In my opinion, oil inventories should ultimately fall to just below 340 million barrels in coming weeks. A 1-2- standard deviation move below the patterns that have prevailed this year would bring oil inventories to as low as 324 million to 331 million barrels before the autumnal rise in crude stocks begins some time in September.

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