Worrying signs as global crude oil inventory hits 80-year high

Crude oil price is expected to remain under pressure with recent data coming out of the United States. Oil prices have fallen by half since Opec refused to reduce production triggering a market share battle between the US and Opec nations.

The US has seen a rise in oil output thanks to a sharp increase in shale gas and shale oil productions. But with oil price crashing, it also seems to be bearing the brunt of the price war.

Inventory data released by Energy Information Administration (EIA) [LINK 1] suggests crude oil inventory is at an 80-year high. During the week ending February 27, 2015 inventory in the US increased by 10.3 million barrel against analyst’s expectation of only 3.9 million barrels. This is the biggest weekly inventory rise in the past 14 years. US oil inventory has been on an uptick for the past eight weeks.

Crude oil inventory currently stands at 444.4 million barrels, which is more than a year’s production. Crude inventories in the Gulf Coast hit a new high of 219.9 million barrels.

A worrying fact is that rise in inventory is despite record number of oil rigs shutting down operations. In the last week to February 2015 US drillers idled 33 rigs bringing their total to 986, highest in the last four years. In the last 12 weeks 589 oil rigs has been shut.

Despite the shutdown of rigs oil production in the US continues to rise. According to a report by Goldman Sachs, oil output growth is expected to be cut by 385,000 barrels per day in the fourth quarter. This however, will not be enough to prevent the US from reporting a record production in 2015. EIA, the US department’s statistical arm, forecasts production to rise by 7.8% to average 9.3 million barrel a day, the highest since 1972.

US has a storage capacity of 521 million barrel of oil; the current inventory levels suggest that its tanks are nearly 60% full. According to EIA these figures do not include the crude storage available in pipelines, in storage adjacent to oil wells and in transit on tankers.

Rising inventory is a cause of concern not only for oil prices but overall economy growth. Current higher inventory is due to reduced consumption which will have a bearing on GDP numbers. In the US, the closure of oil rigs has resulted in rising bankruptcy in the oil and gas sector. This has resulted in building up of riskier derivative products that are linked to the oil sector.

Unless oil demand and oil price picks up sometime soon we might be headed for more troubled times and oil can continue on its journey downwards.