Oil prices have been crushed over the past two years because of a glut of production. With supplies falling off, particularly in the U.S. shale patch, prices have begun to firm up. But another glut that has built up and has stubbornly refused to fall threatens another oil price downturn.
In its July Oil Market Report, the International Energy Agency warned about shockingly high levels of refined products sitting in storage. Gasoline, diesel and heating oil are built up to such high levels in so many parts of the world, that a sharp rise in crude oil prices is unlikely in the short run.
The IEA said that "the fact that crude oil has in the past two months moved within a range in the high $40s/bbl should be a relief for some producers." But it went on to caution that "the existence of very high oil stocks is a threat to the recent stability of oil prices."
The Paris-based energy agency cited one damning statistic: refinery runs in the first quarter of 2016 ran 60 percent higher than refined product demand growth. That has led to a buildup in inventories. The IEA said that "although stocks are close to topping out, they are at such elevated levels, especially for products for which demand growth is slackening, that they remain a major dampener on oil prices."
Of course, as storage levels reach their limits and refiners begin to cut back on production, the pressure on storage facilities should ease. The flip side of that development is fewer refiners purchasing crude oil, leading to a fall in oil demand.
On cue, the U.S. Energy Information Administration released new weekly figures that backed up the IEA's conclusions. The EIA found that for the week ending on July 8, gasoline stocks actually rose by 1.2 million barrels, and remain substantially higher than even the upper limit of the long-run average for this time of year.
The result? Crude oil prices are down sharply during midday trading today, with WTI down nearly 4 percent and Brent off by more than that amount.
By Charles Kennedy of Oilprice.com