Current crude oil inventories are at record high levels of 509 mmb (Figure 9). That's 37 mmb more than at this time in 2016 and 140 mmb above the 5-year average level.
Comparative inventories are also near record highs (Figure 10). When C.I. was at this level in March 2016, WTI prices were around $39 per barrel. When C.I. was slightly lower in August 2016, prices were about $47 per barrel. The trend line in Figure 10 shows that oil prices are probably about $6 or $7 per barrel over-valued.
Figure 10. Comparative Inventories Near Record High Levels--Comparative Inventories Suggest Current Prices Are ~$7 Per Barrel Over-Valued. Source: EIA and Labyrinth Consulting Services, Inc.
Oil prices do not always reflect underlying fundamentals but markets eventually adjust because of them. Comparative inventory analysis suggests that current oil prices are over-valued. It is possible that markets have already priced in anticipated uplift from OPEC production cuts. If so, prices may not increase much beyond present levels and expectations of $70 prices anytime soon are improbable.
OPEC cuts have almost certainly put a floor under oil prices but volatility will continue to characterize markets as it has for the past 2 years. U.S. production is a wild card that will almost certainly be a drag on upward price movement. My guess is that WTI prices are likely to move below $50 per barrel until effects of OPEC production cuts are reflected in falling global inventories.
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Headline crude prices for the week beginning 12 November 2018 – Brent: US$71/b; WTI: US$60/b
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