U.S. Oil Inventory Piles Up, Prices Decline

By Shiv Mehta, CFA | February 19, 2016

On Friday, both Brent and WTI crude oil ​price futures for March settlement declined by 1.05% each, after experiencing high volatility throughout the week. The prices fell after the International Energy Agency (IEA) reported that U.S. oil inventories had risen significantly last week and stand at a record weekly high. This has added to concerns of market participants over the global oil supply glut.

Rising U.S. Oil Inventory

According to the report released by the IEA, U.S. oil inventory increased by 2.1 million barrels to 504.1 million barrels. The increase of 2.1 million barrels is the highest weekly record to date. According to the last monthly data released by the IEA, U.S. oil inventories rose above 500 million barrels for the first time in 86 years.

Oil Prices up 3% This Week

Despite the IEA report, oil prices are on track to post a 3% rise for the week ending Feb. 19, 2016. The rise is attributed to the agreement between four oil producers – Russia, Venezuela, Qatar and Saudi Arabia – to “freeze” their oil production to their respective January output in a bid to support oil prices from falling further.

Although Iraq has also agreed to freeze their production, Iran has precluded itself from the agreement in a bid to regain its market share after sanctions were removed against it earlier this year. All the OPEC members will continue to wait for Iran to cooperate before they freeze their own production.

Jason Gammel, oil analyst at Jefferies, said, “The key contingency – cooperation from other OPEC members – seems to preclude any real physical effect on the market.” (See also: OPEC VS. the U.S.: Who Controls the oil Prices?)

Will excess supply continue?

It was believed that the global excess of oil supply would come down on expectations of a decline in U.S. oil supply. However, the U.S. continues to produce 9.1 million barrels per day, despite closing 60% of its oil rigs and low capital expenditures by companies.

Alan Oster, chief economist at the National Australia Bank, said, “The excessive supply isn’t going away. We don’t see global demand picking up anytime soon. There is lot of pain in the oil industry.” He also said that oil prices would recover to $40 per barrel by the end of this year. (See also: Oil Price Analysis: The Impact Of Supply & Demand.)

The Bottom Line

As U.S. oil inventories continue to increase and no announcement of a supply cut coming from other oil producing nations is forthcoming, oil prices will remain under pressure.

A Singapore-based trader said, “We are essentially back to square one. The imbalance is not going to reverse anytime soon so prices will stay depressed until more higher-cost producers such as those in North America are squeezed out.”