Oil's Outlook Remains Poor

| About: The United (USO)

Summary

Crude inventory shrunk by 2.2 MMbbl, 0.3 MMbbl less than expected.

The change in inventory was within the acceptable range of -7.1 MMbbl to +2.9 MMbbl.

The jump in imports, particularly from Saudi Arabia, supports our bearish view.

Imports from Venezuela fell, offsetting higher imports two weeks earlier.

In my pre-release analysis I stated that the street estimate of the change in crude stocks was a bit aggressive (read What To Look For). On Thursday, EIA released data for the week ended July 1 st, and it turned out that analysts were indeed a bit too optimistic.

WTI crude (NYSEARCA:USO) fell 4.8% on news that crude inventory only shrunk by 2.2 MMbbl, 0.3 MMbbl shy of Bloomberg's survey estimate of 2.5 MMbbl. The difference was quite small, but when the market is baking in a larger decline, any misstep will be punished. The decline was also well within my "safe" range of -7.1 MMbbl to +2.9 MMbbl, hence there is no reason to question our bearish view.

With the last week in June wrapped up, crude inventory's post-April decline (from 1238.5 MMbbl to 1219.5 MMbbl) has caught up to 2015's rate of -1.5%. Whether it goes a bit over or under in the near future is not important in my opinion. As I mentioned in my previous article, crude inventory is the end result of supply and demand; without understanding the fundamentals, it's just a number.

Speaking of fundamentals, imports jumped significantly. Gross imports increased by 10.7% from 7.56 MMbbl/day to 8.36 MMbbl/day. With this new information, we can finally establish a positive trend for imports in 2016.

Click to enlarge

Source: data from EIA

Believe it or not, the trend line was actually slightly negative before this week.

Breaking down imports by country, we saw a huge surge from Saudi Arabia. Their exports to the U.S. increased from 738 Mbbl/day to 990 Mbbl/day. While this jump is not indicative of near-term growth rates (week-to-week fluctuations are huge), rising imports from the leader of OPEC does support our bearish view.

Another country that is worthy of discussion is Venezuela. Due to the countries' instability, many oil bulls believe that the country holds the key to higher oil prices. Despite the country's economic turmoil and declining production (possibly the result of low capital investment), imports from the country have remained relatively stable. The latest weekly figure of 670 Mbbl/day is less than the 12-week average of 739 Mbbl/day; but we did import at a rate of 888 Mbbl/day just two weeks earlier, so the recent drop evens it out.

Conclusion

There is no reason to be alarmed about the declining crude inventory. In fact, the market has punished oil bulls for making overly aggressive estimates. As summer fades, inventory declines will become increasingly more significant as inventory tend to build up during the fall. If inventory continues to decline beyond September or October, then we may have a problem. In the meantime, we just need to ensure that inventory changes aren't too out of whack (i.e. falls within our range).

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