International oil prices fell sharply on Tuesday night. wti crude futures fell more than 2% below $64; brent crude futures fell 1.95%. Analysts noted that the near-month contract on U.S. benchmark Crude Oil futures has recently fallen below the later contract, reflecting concerns that U.S. crude inventories are starting to build after last month’s cold snap.
In addition, the U.S. crude oil price curve is likely to weaken further in the coming weeks as demand for U.S. crude from Asian refiners is weakening.
The U.S. crude oil futures curve is showing signs of tightness, with recent spreads on WTI crude futures falling to their lowest point since January, a bearish structure that suggests an oversupply.
This weakness is likely to spread to the later months of the contract. U.S. oil companies are back to normal oil production after last month’s cold snap, but they now lack buyers for their oil supplies.
Asian refiners, the largest buyers of U.S. domestic crude, are set to start plant maintenance programs next month. Combined with high Chinese inventories, oil imports from the Far East will be reduced for the U.S.
Meanwhile, some U.S. Gulf Coast refineries are still recovering from February’s cold snap. The lack of domestic and foreign demand, combined with increased shale drilling activity since the February cold snap, has led to a cumulative increase in U.S. crude inventories of nearly 40 million barrels in the past three weeks, which has reached its highest level since the end of last year.
Bob Yawger, head of the futures division at Mizuho Securities, said U.S. Gulf Coast crude oil export data has been poor due to lack of demand, and futures spreads reflect this.
U.S. crude exports have been hovering below 3 million barrels per day since mid-February. In addition to the lack of consumption by Asian refiners, foreign buyers of U.S. crude have reduced their imports because the discount in Permian Basin crude prices to the global benchmark Brent crude price is not large enough to offset transportation costs of up to $2/bbl.
On Monday, Houston WTI crude prices were discounted by about $2.27 a barrel to Brent crude.
U.S. oil inventories could increase further and have an impact on the WTI crude oil futures curve. So far this year, WTI crude oil futures prices have accumulated about 34% and are still holding above $65 per barrel.
In a report dated March 12, Bank of America Global Research said the rapid rise in WTI crude oil futures prices could trigger larger hedges and eventually more drilling activity. According to a U.S. government report, shale production in the Permian Basin will increase by 11,000 barrels per day to 4.292 million barrels per day in April this year.
Edward Moya, senior market analyst at Oanda, said in a report that the short structure in WTI crude futures is not surprising given the strong growth in inventories over the past few weeks.
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