Why oil is likely headed lower in the weeks ahead
From Justin Brill, Editor, Stansberry Digest:
Crude oil is breaking down again…
Last Wednesday, the U.S. Energy Information Administration (“EIA”) reported crude-oil inventories unexpectedly declined by 930,000 barrels to 527.8 million barrels last week.
Typically, this would be seen as a bullish development… But oil plunged on the news. West Texas Intermediate crude – the U.S. benchmark for prices – fell as low as $47.30, its lowest level in five weeks.
What should we make of this? The answer likely has to do with gasoline…
You see, the EIA also reported gasoline inventories rose by 191,000 barrels to 241.2 million barrels last week. This is more than 10% higher than the seasonal average over the past 10 years. So it appears the recent drop in oil inventories was driven by refineries ramping up gasoline production.
But it’s important to note that this move isn’t being driven by rising demand.
In fact, gasoline demand has been falling for three straight weeks.
In other words, this trend isn’t sustainable… Some of the glut in oil supplies has simply moved into gasoline supplies instead.
But unless demand suddenly returns, it’s only a matter of time before refiners cry “uncle”… and a big source of U.S. oil demand will dry up.
Meanwhile, U.S. oil production continues to climb. The EIA reported production increased another 28,000 barrels per day last week, for the 11th consecutive week.
Falling demand and rising supplies suggest lower oil prices are likely.
And should OPEC fail to extend its recent production cuts – which expire at the end of June – all bets are off. Crude oil could plunge back below $40 or even $30 per barrel.