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Near-Record Oil Inventories Remain A Persistent Headwind For Crude Prices

From Matt Smith: Crude headed lower on Wednesday after a solid build to crude inventories from the weekly EIA inventory report. As U.S. inventories climb to a new record high, crude is having a tough time believing that the market is re-balancing. Hark, here are five things to consider in oil markets today.

1) Yesterday we discussed how Saudi Arabia and Iraqi crude export loadings had been swinging to the east of Suez for the first two months of the year, sending more crude to Asia. We also highlighted that this trend had changed in March, and export loadings were favoring the U.S. instead (eta = April, into May).

We can see in our ClipperData below that Saudi arrivals into the U.S. so far this month have dropped off significantly – a result of those January barrels heading to Asia instead. Iraqi imports are actually up so far this month, and should maintain this strength based on our projections. Venezuelan barrels have trended lower in recent months as more crude has headed to Asia (think: oil-for-debt with China, others) but are bouncing this month, while Kuwaiti arrivals have drifted lower too.

On the aggregate, OPEC arrivals are at 2.75 million barrels per day so far this month – down 13 percent on January’s volume. That said, January’s OPEC imports were the highest in three and a half years.

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2) U.S. crude inventories have reached a new record high with this week’s EIA report, climbing to 532 million barrels. The chart below shows U.S. oil inventories on a year-over-year basis, highlighting how inventories have been above year-ago levels for the past couple of years, peaking in late 2015 at over 100 million barrels.

Though we saw this surplus swiftly eroded in the first quarter of last year, it rebounded through the summer, before dropping to just 20 million last October. But as U.S. production is on the rise once more, and as refinery runs remain somewhat in check, the surplus has increased to 30 million barrels – amid an absolute inventory build of 54 million barrels so far this year.

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3) Another sign of Venezuela’s economy spiraling out of control comes via its money supply. As the chart below illustrates, inflation is going through the roof. Inflation in the Latin American nation has reached such epic proportions that the government has refused to publish the data anymore.Related: The Oil Market Is At A Major Turning Point

Watching the Venezuelan economy deteriorate is like watching a slow-motion car crash, waiting for the inevitable. That said, we still see in our ClipperData that PdVSA facilities in Curacao continue to bring in U.S. crude and naphtha – to use as diluent for its bitumen-like crude. Once we see these arrivals stop, we will know that Venezuela has finally run out of money.

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4) Next month sees the next semi-annual debt redetermination period by banks for U.S. producer debt. While the recent price drop is raising concerns that there may be some downward revisions to credit lines, the chart below illustrates that most U.S. drillers have the majority of their credit lines still available – which should calm bankers’ fears.

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5) Finally, it is World Water Day, so let’s take a look at water demand from the energy sector, as well as energy demand from the water sector (take a second to let that sink in). With both water and energy demand on the rise, the IEA predicts that water consumption in the energy sector is set to rise by more than 60 percent by 2040, while energy demand for water supply is projected to double over the same period.

Currently, a quarter of the electricity consumed by the water sector is for wastewater collection and treatment. Driving an increase in electricity consumption by 2040 is wastewater treatment, as well as desalination:

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The United States Oil Fund LP ETF (NYSE:USO) rose $0.03 (+0.3%) in premarket trading Thursday. Year-to-date, USO has declined -13.65%, versus a 4.81% rise in the benchmark S&P 500 index during the same period.

USO currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #54 of 122 ETFs in the Commodity ETFs category.

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