Oil markets took a relatively positive initial view of EIA inventory data for the week to 17 August, particularly given the more negative tone in financial markets more generally. The draw in US crude inventory of 5.4mmbbl was indeed much larger than the 0.3mmbbl anticipated by the market ahead of the data release but can largely be explained by a 0.5mmb/d (-5.9%) WoW drop in crude imports. Crude inventory remains above the top of the prior five-year range and, in our view, the decline most likely reflects the refining industry’s continuing effort to bring crude back in line with refining requirements.
It was also notable that refinery utilisation dropped 1.4% WoW, which compares with the 0.3% drop the market had been expecting, representing a fall in throughput of 0.2mmb/d more than had been forecast. Crude inventory remains ample, relative to refinery demand, we believe.
Underlying demand fell back sharply from around average levels to below the bottom of the prior five-year range with demand falling 1.3mmb/d (-6.4%) WoW to 18.7mmb/d and with every single product category registering a WoW drop in implied demand.
We continue to believe that the further bounce in oil prices since the start of August has largely been driven by geopolitical concerns, most notably the fear of a unilateral Israeli attack on Iran. We continue to believe that such an attack would not receive US support and is a low probability event. As and when the market takes that view, possibly in combination with the easing in seasonal production maintenance, oil prices are likely to slip, potentially quite sharply.