Oil’s Fundamentals Could Be Weakening After a Big Surge


Energy stocks and crude oil were among the market’s best performers in the third quarter, but fundamentals may be weakening.

The sector started climbing in late June as Energy Department data showed crude-oil inventories remaining near long-term lows. The Strategic Petroleum Reserve also fell to its lowest total in 40 years. Other headlines at the time augmented the bullish case. U.S. economic data continued to surprise to the upside throughout the summer. Russia also unexpectedly extended supply cuts on September 5.

Now at least three developments may be pointing the other way.

Crude oil inventories (@CL), daily chart, showing key events.

Inventories, Production, Geopolitics

First, inventory data in the last two weeks suggests shortages are fading. The government reported on October 4 that gasoline inventories increased by 6.5 million barrels, while analysts expected little change. A second report on October 12 showed crude inventories bloat by by almost 13 million barrels — the biggest increase since February.

Second, production is increasing. The Energy Information Agency (EIA) estimated that U.S. fields will pump 13.2 million barrels per day in October. That’s slightly above the pre-pandemic record of 13.1 million barrels. A separate report on October 4 noted a steady uptick in capital expenditures. This may suggest the trend toward stock buybacks is diminishing as companies shift toward increasing production.

Weekly oil production estimates from the U.S. Energy Department’s Energy Information Agency (EIA).

Third, geopolitical risks may be less than feared. For example, oil surged last week after Hamas’s deadly terror attacks on Israel. However, U.S. intelligence sources told Reuters last Wednesday that Iran wasn’t directly involved. That reduces the possibility of escalation into the Persian Gulf and the key Straight of Hormuz.

Meanwhile, the news agency reported that a pipeline carrying 450,000 barrels a day from Iraq to Turkey was set to reopen.

Then on Monday, Reuters reported that the Biden Administration may soon ease sanctions against oil giant Venezuela.

In conclusion, oil remains a key commodity for the global economy. It also impacts inflation, which gives it an influence over interest rates and Federal Reserve policy. High oil prices have squeezed the economy and spooked markets since late 2021, but now there could be signs that the longer-term crunch is easing.

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