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Crude oil prices are down amid weaker outlook for demand and rising inventories

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Crude oil prices are down by more than 2% on Wednesday due to a weaker outlook for oil demand and rising crude oil inventories in the United States, despite mounting expectations for continuing cuts in production by OPEC.

The futures on US crude oil WTI declined by 2.3% to 51.84 USD per barrel, while Brent variety fell by 1.73% to 61.21 USD per barrel.

WTI oil

The Energy Information Administration has reduced its forecast for growth in global demand for crude oil in 2019 by 160,000 barrels per day to 1.22 million barrels per day. The production expectations in the US have also dropped to 12.32 million barrels per day, down by 140,000 from the May forecast.

Crude oil reserves in the US grew by 4.9 million barrels to 482.8 million barrels in the week ending June 7, according to data from the American Petroleum Institute (API). For comparison, analysts’ expectations were for a decline of 481,000 barrels. The official data from the Energy Information Administration are expected later on Wednesday.

Thus, along with the fears of growing supply in the focus of oil markets, is the continued trade tension between the US and China, which are the two largest oil consumers in the world.

The crude oil price target of less than 60 USD per barrel is realistic by the end of 2019. Under the current situation, things would hardly turn so fast that oil and stock deficiency would result in a rise in prices.

The EIA reports expecting Brent to remain at 67 USD per barrel in 2020. The EIA’s lower Brent price path for this year reflects rising uncertainty about global oil demand growth. Brent spot prices averaged 71 USD per barrel in May, largely unchanged from April and almost 6 USD per barrel lower than the price in May 2018. However, Brent prices fell sharply in recent weeks, reaching 62 USD per barrel on June 5.

The market is currently focusing on the next meeting of the Organization of Producer Countries (OPEC) expected in late June to prolong supply constraints. OPEC+ group cut oil yield by 1.2 million barrels per day since the beginning of the year to support prices. There are indications that OPEC members are close to reaching an agreement to extend the restrictions.

The OPEC meeting is expected to take place on June 25-26, but according to some sources, Russia has requested a change for July 3-4.

US oil inventories

The American Petroleum Institute reported late Tuesday that US crude supplies climbed by roughly 4.9 million barrels for the week ended June 7.

The API also reportedly showed a stockpile increase of 829,000 barrels in gasoline, while distillate supplies fell by 3.5 million barrels.

Cushing inventories also saw a sizable gain, and gasoline inventories grew as well.

Last week, the API reported a surprise build of 3.545 million barrels. A day later, the EIA estimated that US inventories had built by even more, by 6.8 million barrels.

The net builds now a hefty 35.05 million barrels for the 24-week reporting period so far this year.

Inventory data from the Energy Information Administration will be released Wednesday. The EIA data are expected to show crude inventories edged up by a modest 80,000 barrels last week, according to a survey of analysts conducted by S&P Global Platts.

The survey also forecast a supply decrease of 380,000 barrels for gasoline, but distillates were expected to rise by 704,000 barrels.

Global oil demand

The EIA expects global oil demand to rise by 1.2 million barrels per day this year, which is 200,000 barrels per day lower than the May forecast. The EIA also expects demand in 2020 to increase by 1.4 million barrels per day, about 100,000 barrels per day lower than the previous forecast.

Declining crude oil production in Venezuela and Iran, as well as Saudi Arabian’s over-compliance with the agreed-upon production cuts, pushed crude oil output among members of the Organization of Petroleum Exporting Countries to 29.9 million barrels per day in May—the lowest for any month since July 2014.

In addition, production shut-ins in Russia related to contamination of the Druzhba crude oil pipeline have emerged. The market effect of these reductions has been compounded by planned maintenance on crude oil production platforms in the North Sea, where crude oil grades are in many cases substitutable for the disrupted Russian barrels.

The EIA forecasts global oil production to increase just 190,000 barrels per day this year, with the production growth from the US offset by the decline from OPEC.

Despite the recent demand uncertainties, the EIA still expects a need for inventory withdrawals to meet demand given its forecast of near-term global crude oil production.

In this month’s report, EIA forecasts global oil inventories will decline by 300,000 barrels per day this year and then increase by 300,000 barrels per day in 2020. The EIA forecasts that global oil inventory withdrawals in this year’s second and third quarters will average 200,000 barrels per day and 600,000 barrels per day, respectively.