September 13, 2017 by Sean Coakley
This week’s Department of Energy report indicated a build in crude inventory of 5.9 million barrels -versus forecasts set around 4.1 million barrels. This comes after last week’s 4.6 million barrel gain. Given the damage wrought by Hurricane Harvey, a considerable jump in crude inventories was to be expected. However, this latest read spells trouble for a North American crude market that has been struggling with overcapacity since the collapse in oil prices began nearly two years ago.
From a pricing perspective, a sense of normalcy is returning to crude and downstream markets as refiners cautiously resume production. Refined products have seen large scale price reductions relative to the highs seen earlier in the month – but the same cannot be said for the spread differential between West Texas Intermediate and its international counterpart. While the gap between the North American and Brent benchmarks has stabilized, it remains around the $5-6 mark.
Weakness in calendar spreads also suggests that markets expect the local oversupply of Texas Tea to persist for some time. With US export capacity currently at 17 percent of its pre-storm level, traders looking to ship product to global consumers are likely to be frustrated.
Bottom Line: Refining and export capacity will take time to rebuild, as only now are Gulf oil facilities seeing restarts – keeping West Texas tea hanging around the $48 handle. For the time being, the great North American crude glut will continue.
Sean Coakley, CFA
To receive our weekly market briefing, breaking market wires and research reports direct to your inbox subscribe!
About the Author:
Sean specializes in developing and executing process-driven hedging strategies designed to mitigate corporate and institutional clients’ FX risk exposure while enhancing their competitive position. Sean is a CFA Charterholder, and an active member of Cambridge’s market research team, responsible for producing Daily Market Analysis