Years ago, Chris Rock had a joke about how easy it was for drug dealers to do business. He never knew one that said, “Man, how am I gonna get rid of all this crack?”
Not long ago, it seemed like you couldn’t say the same for oil. But today we’ve got just that problem. And producers are saying, “How am I gonna get rid of all this oil?”
Right now, U.S. oil inventories are at a 22-year high. We haven’t had this much oil sitting in U.S. pipelines and refinery storage tanks since we were gearing up for the first invasion of Iraq in 1991.
Now, part of this is seasonal. Refineries chose this part of the year to shut down for maintenance to take advantage of the lull between heating season and driving season. Refineries generally work at around 87% capacity. But this March they fell as low as 81% and are now at 85.7%, based on the latest weekly numbers.
Even so, 22-year highs don’t come from seasonal pressures. We’re sitting on a stockpile of 387 million barrels of crude.
This is largely a function of rising output. U.S. crude oil production is up 23% over last year. That’s including an actual decline in North Dakota production thanks to rough weather. As the summer comes around, and the fracking and drilling boom continues, production should only rise.
The historical release valve for high inventories used to be OPEC. The cartel would cut production to tighten up oil supplies and return to normal levels, but that’s not going to happen now.
First, OPEC simply doesn’t have the power to either regulate its own production or affect prices the way it has in the past. Second, OPEC production is already at its lowest level since 2011. If it were to cut another million barrels or so (of its 30 million-barrel daily production) it would be operating at levels only previously seen during U.S. recessions.
That means there’s only one way to get rid of this abundance of crude, and that’s to lower prices.
It’s clear that when the change in crude oil inventories stays positive for a few weeks, lower prices follow. When inventory finally does fall, it’s a leading indicator for rising prices.
Financial markets as a whole have exhibited low volatility for a while now. That’s included oil prices. But unless demand picks up rapidly (possible, but unlikely) or production falls (highly unlikely), prices are heading below $90 per barrel in the next few months.
Ahead of the tape,