Saudi Arabia has begun to replenish its crude inventories as production returns to normal levels following the September 14 attacks.
With fears over supply losses mostly gone, oil prices have fallen as attention returns to the global economy and concerns over weak demand.
Is this the correct response? Are fundamentals as bad as prices suggest?
Crude inventories provide an excellent indicator on supply-demand balances and a strong connection to fundamental price activity.
Our data, which comes from actual measurements using satellite radar imagery, shows global inventories falling more than 6% since early June.
Draws are typical for the summer, though the size of the declines has been greater than last year, which can be interpreted as a bullish sign.
The most recent catalyst was Aramco’s drawdown of inventories to meet export commitments.
Unless something changes, that trend will likely reverse itself as operations return to normal in Saudi Arabia.
Saudi inventories rose the week of October 3, though storage remains below pre-attack levels.
Inventories at Ras Tanura and Yanbu, two of the largest storage sites in Saudi Arabia, both increased last week, but remain below the average level over the last 12 months.
Saudi Aramco restored oil production and capacity to pre-attack levels of about 9.7 million bpd, the head of the company’s trading arm, Ibrahim al-Buainain said September 30.
Saudi Arabia production was around 8.6 million barrels per day in September, according to a Reuters survey.
The amount supplied to the market was larger -- estimated at 9.05 million bpd -- because Aramco tapped inventories, the survey said.
Saudi Arabia’s September’s supply was still 700,000 bpd less than August. That hiccup could be felt as far away as China.
Officials from the Chinese company that buys crude for the privately-run Rongsheng refinery said loadings of Saudi crude were delayed a few days in September.
The Rongsheng refinery can process 400,000 bpd and is located on an island close to the city of Zhoushan.
Disruptions to Saudi exports likely contributed to declines in China’s crude inventories, as the graph below shows.
Saudi Arabia saw the biggest drop among OPEC members in September, the survey found.
Total OPEC oil output fell to 28.9 million bpd, down 750,000 bpd from August, and the lowest level since 2011.
Output also fell in Venezuela as state-owned PDVSA continued to struggle under the weight of a long-term economic meltdown and added pressure from Washington.
Tougher US sanctions imposed in August against Venezuela have scared away customers of state-owned PDVSA.
That’a topic we covered at the end of August when the impact was already being felt.
Venezuela’s crude inventories have been rising, particularly at El Jose, the main export terminal.
That said, the loss of Venezuelan supply faded long ago into the background, unable to provide much of a lift to oil prices.
The biggest risk came from the Middle East. At first, the September 14th attacks embodied the worst case scenario, but the lack of escalation combined with Aramco’s quick repairs removed the premium from the market.
There are even signs of a reduction in Saudi-Iran tensions.
This week, Iran’s oil minister Bijan Zaganeh referred to Saudi Arabia’s new energy minister, Prince Abdulazaiz bin Salman, as a “friend for over 22 years.”
On top of this, seasonal crude demand is ebbing.
US refinery activity has dropped three straight weeks through September 27, according to Energy Information Administration data.
Refineries typically cut runs this time of year due to seasonal maintenance. Though last week’s utilization rate -- 86.4% of capacity -- was the lowest for this time of year since 2017.
And then came some bearish economic news.
US manufacturing activity fell last month to a 10-year low, according to a survey by the Institute for Supply Management (ISM).
With all that said, is it any wonder that price action has pointed in one direction of late? Down.
What do you think? Are oil market fundamentals as weak as prices suggest? Or is there a market disconnect between price volatility and fundamentals? Are markets solely focused on exogenous factors grabbing headlines?