Sometimes it’s how the market doesn’t react that’s important.
Today the U.S. Energy Information Administration reported a surprising build in U.S. crude oil inventories of 5.8 million barrels for the week ended on July 13. This comes after a big drawdown of 12.6 million barrels in the prior week.
This news comes as oil prices showed weakness on reports of increased sales of oil from Saudi inventories and speculation that the United States would sell oil from the Strategic Oil Inventory.
Despite this, though, oil prices have barely budged today. After some early weakness–U.S. benchmark West Texas Intermediate was down 5 cents a barrel or 0.07% in the early going–oil is actually higher as of 12:15 p.m. New York time. West Texas Intermediate traded up 26 cents a barrel or 0.38%. International benchmark Brent crude was ahead 48 cents a barrel or 0.67%.
Why the lack of a big negative reaction to the news?
First, I think traders aren’t especially impressed by this kind of week to week volatility. After the huge 12.6 million draw down in the earlier week, the increase of 5..8 million barrels still averages out to a drop in inventories over the two week period.
Second, I think the market is skeptical that Saudi Arabia will be able to increase production enough to meet OPEC targets for increasing supply and to make up for the now normal volatility in production from Nigeria, Libya, and Venezuela, and to offset the potential loss of Iranian oil to the market as the United States seeks to impose sanctions.
The overall picture, whatever the near term volatility, still looks like tight supply with the potential for actual supply disruptions. The big increase to reliable production has to wait until U.S. oil shale producers end transportation bottlenecks in the Permian Basin.
