US oil inventories: Historic sell-off in SPR and business

(Alexander Kuptsikevich – FxPro Financial Services Limited)

US commercial oil inventories rose by 2.4M barrels last week following an increase of 8.8M earlier. This dynamic fits in with seasonal trends, with inventories starting to fill at some point in September. Around the same time and volume levels, net accumulation was reversed in 2018 and 2019. Note, however, that before 2014 (the shale boom), the fluctuations in stocks were mainly within the 300-360M range. So, here we see some business as usual for commercial producers.

A vital point of the picture is the 30% drop in strategic reserves over the last year, almost equal to commercial reserves.

In other words, a net fall in overall inventories could have stimulated a ramp-up in production. But we see a slow increase in volumes in comparison to the 2011-2015 and 2016-2020 episodes. And there are a couple of significant reasons for this.

First, the sale of oil from reserves is aimed at bringing down the final price, which is not to the producers’ liking and is holding back investment. In the last couple of weeks, the number of working rigs in the US has been falling, clearly showing that businesses are in no hurry to sell oil at a discount from the free market, topping up reserves.

Secondly, production in the Permian Basin – the main shale production region of recent years – is declining. New drilling is going to make up for the exhausted fields. Increased rates and the promise to raise more, combined with rising wages, further hold back the process.

As if that were not enough, US producers said Europe should not expect further supply increases. Perhaps this signals that companies following OPEC have switched from fighting for market share to maximising profits.

As a result, we see gains in oil and gas prices over the last week against a general decline in financial markets. At the same time, we believe that the US government is unlikely to quickly abandon its oil price restraint policy, postponing the restocking momentum.

Investors and traders should also remember that a decisive policy tightening, by historical standards, puts additional pressure on prices. In our view, the downward momentum in oil prices is not over yet, although local attempts for WTI to exceed $91.50 and for Brent to return to $97 cannot be ruled out.

Silver slides on hot US inflation [Video]

(Giles Coghlan LLB, Lth, MA – HYCM)

Recently we noted that silver prices had fallen over recent weeks on aggressive Fed hiking expectations and strong USD bids. This has led to notable selling pressure in both gold and silver. The expectation for earlier this week was that headline inflation would fall to 8.1% from the prior of 8.5%. In the event headline inflation printed higher than expected at 8.3 and the core rose too. This all but sealed in the chances of a 75bps rate hike at the Fed’s next meeting and immediately resulted in silver downside as expected.

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Major Trade Risks: The major risk here is any data that indicates US inflation is actually falling.