The latest US Energy Information Administration's inventory data is very telling on where the market stands and how traders are having trouble trying to justify any increase in oil prices for the foreseeable future.
Consider the last three weeks of inventory data released by the EIA. For the past three weeks, data tells us that, in spite of recent drops in refiner capacity and utilization, crude inventories have been showing pretty robust builds in what some even say are in the face of dropping US domestic production.
Well, the oil is coming from somewhere, isn't it?...
US domestic production still hasn't shown a solid drop in production and output since the last figures we saw in December. Current production rests somewhere in the 9.2 million barrel per day range. No doubt, some small-time producers are having some troubles, but it's my belief that these same small-time producers have no choice but to pump to pay off their investors. They simply can't shut down...
It's best for them to risk bankruptcy than to shut down and risk losing any hope of gaining back investors if oil prices rebound. Keep pumping and hoping...
Elsewhere, Saudi Arabia chatter is that they're in talks with Russia over the possibility of production cuts that may only be a pipe dream. The truth is for the Saudi's is that they simply can't cut back production without losing market-share to neighbouring Iran, who some time ago, promised to get back their market-share lost to the Saudi's when sanctions were first placed on them years ago. Their "re-entry" into the oil markets has the Saudi's on notice that there will be a price war.
Secondly, with the prospect of Iran pumping more, why would the Russians risk losing their own market-share to the Iranians?
Three weeks in a row now, the EIA has reported more than 20.8 million extra barrels of crude oil into the US markets. Space to store it is beginning to disappear at a prodigious rate and consumers simply aren't burning gasoline like they used to. With inventory builds ranging 16.5 million barrels ahead of the build-up to the summer driving season, why would I risk putting money into a so-called "bottom" to oil prices?
Finally, enter the dragon called China. With weakening manufacturing data, low demand growth and an overall faltering economy, where again is the impetus for oil? Prices are low worldwide, but no one is buying.
God help the markets if China decides to stop their investment and top-up of their strategic reserve! You can look for an immediate availability of 500,000 barrels a day if they stop their program of building it. The ramifications of that could be felt soon enough! But is this the response we're waiting for from China? Are they the factor we're all waiting for to see what a fair world price of oil should be...or could be?
Is our own economy waiting for China alone?
So, what do we look for? Any hope of rising oil?
The market hope rests in one fact, a point that Saudi Arabia may have been forcing on us in the first place: Why pump in the west if you don't have to? Strategic drilling and the forced shut-down of projects and exploration may be the only hope, as fleeting as they may be, that world production itself gets a hit merely on affordability of projects already started but not as yet producing.
The new dragon in the markets may simply be found in the wheat and corn husk fields ranging between the Dakota's and the Texas Oklahoma panhandles. Simple ability to respond to any crisis, or downfall in world production could be as easy as turning the spigot Stateside.
Even then, that response can be short-lived!