US oil prices slide as stocks accumulate at Cushing

U.S crude oil prices are anticipating an increase in inventories as the market moves into surplus during the first quarter of 2024, despite an expected extension of current production cuts by Saudi Arabia and its OPEC⁺ partners.

U.S. crude futures for deliveries in January 2024 closed at US$77 per barrel on November 15 – still up from a low of US $68 at the end of June, but a significant retreat from the recent high of US$87 at the end of September.

So far in November, front-month U.S. crude prices have averaged just under US$78.50, which after adjusting for inflation is exactly in line with the average since the start of the century.

Prices are no longer sending a strong signal to increase oil drilling and production which should ensure output flattens by the middle of 2024.

The structure of the futures curve – which is closely tied to expectations about changes in production, consumption and inventories – has already flattened as traders anticipate crude will become more plentiful.

Calendar spreads for the first two listed months have slipped into a small contango for the first time since the end of June, anticipating the increase in inventories.

 Cushing rebuilds

In a sign crude is becoming more plentiful, commercial inventories held around the NYMEX delivery point at Cushing in Oklahoma have started to rise significantly for the first time since the second quarter of 2023.

Cushing inventories have risen in each of the four most recent weeks by a total of 4 million barrels since mid-October after depleting in 14 of the previous 16 weeks by 22 million barrels since late June.

Cushing stocks were 18 million barrels (-42% or -1.24 standard deviations) below the prior ten-year seasonal average on November 10, but the deficit had narrowed from 21 million (-50% or -1.42 deviations) two weeks earlier.

Since the end of October, crude inventories have also risen across the rest of the Midwest away from Cushing (+1 million barrels) and at storage sites along the Gulf of Mexico (+11 million barrels).

The relentless depletion of stocks that characterised the third quarter has been replaced by a small but consistent stock build from early in the fourth.

Closely tracking the gradual stabilisation and then accumulation of inventories, the three-month calendar spread has collapsed from a severe backwardation in late September close to level in mid-November.

In fact, the spread is now close to its long-term average even though stocks are still well below the norm for the time of year.

The spread’s weakness implies traders anticipate inventories at Cushing and elsewhere will accumulate even more in the weeks ahead.
U.S. crude production remains at its highest level on record, with no sign of turning lower, after OPEC⁺ threw a lifeline to U.S. shale producers by cutting its own production throughout the third and fourth quarters.

Crude output from other non-OPEC non-shale producers is also still climbing while the major economies exhibit signs of slowing growth and therefore smaller increases in oil consumption.

Bears ascendant

Matching the rise in inventories and the collapse in spreads, investors have abandoned their previous moderately bullish stance and become very bearish about the outlook for U.S. crude prices.

Hedge funds and other money managers had boosted short positions betting on a further fall in prices to 145 million barrels by November 7, up from 59 million barrels on September 26.

Overall, financial investors still hold more bullish long positions than bearish short ones, but fund managers have been sellers of crude in every one of the last six weeks, reducing their position by a total of 196 million barrels.

The net position had been cut to just 90 million barrels (4th percentile for all weeks since 2013) by November 7 down from 286 million barrels (60th percentile) six weeks earlier.

Position-building anticipated, accelerated and amplified the rally in spot prices and spreads during the third quarter, but it is now working in reverse to weaken them in the fourth.

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