Crude oil has been in a bear market for much of this year and the VelocityShares 3X Long Crude ETN is down 41% in the year to date. In the last couple of weeks, the oil market has seen pockets of the occasional rally and it appeared that the worst is over for the black gold. However, all the hopes of a rally in oil are being crushed after data shows that inventories have reached an all-time high.
The weekly data released by the U.S. Energy Information Administration (EIA) on shown that the inventory for oil and product stocks has climbed to epic proportions. The EIA reported that oil inventories have soared to 519.5 million barrels in mid-July. The inventories are at least 60 million barrels higher than the stock in the same period last year. The worst part is that U.S. crude oil and refined product stocks gained 2.62 million barrels to skyrocket to an all-time high of 2.08 billion barrels.
Crude oil price crash due to massive increase in inventory
Reuters reports that crude oil prices took a beating on Thursday after news of the increase in oil stocks and inventory broke. The Brent crude LCOc1 was down by as much as $0.97, or 2.1% to close at $46.20 a barrel. In addition, U.S. West Texas Intermediate (WTI) crude lost $1, or 2.2% to close at $44.75 on Thursday. In response to the weakness in oil, the VelocityShares 3X Long Crude ETN ETN was down 6.27% to close at $23.31 on Thursday.
Under normal conditions, oil inventories should be dropping because the end of summer signifies the start of the maintenance season for refiners. Refiners are not expected to pump oil out during maintenance season because their plants will be out of commission. The fact that refiners are not pumping oil should reduce the supply of oil in the market and oil prices should have started building momentum for a rally.
However, the fact that oil inventory is at an all-time high when it ought to be falling indicates that the supply of oil is still significantly more than the demand. Pete Donovan, broker at Liquidity Energy in New York observes that crude oil prices are down because the inventory data is disheartening. In Donovan’s words, “The market is technically weak, inventories are still high for summer, maintenance season is not far off and we have floating barrels at sea to top it all.”
There’s no end in sight for the weakness in crude oil
Investors in the VelocityShares 3X Long Crude ETN ETN may want to tie their bullish hopes to the fact that Crude oil stocks were down 2.3 million barrels to mark the 9th straight week of declines. The decline in crude oil stocks suggest there’s a slow but steady rebalancing the demand and supply dynamics of the crude oil market.
However, the fact remains that the increase in crude oil inventories extends all the way from China, through Europe, and into the United States; hence, there no hope of a rally in sight for oil prices. Peter Lee, an analyst with BMI Research maintains that “Gasoline supply growth is outstripping consumption growth in China, while exports are also growing in the likes of South Korea and Japan.” Stuart Ive, a client manager at OM Financial observes that “[T]he continued gasoline builds have led some to speculate that this will lead to builds in crude as refineries cut back on production.”