The EIA released a report of great declines in the U.S. inventory in its most recent data release, showing that a drawdown of 6.5 million barrel for the week ending on August 4, which means that the U.S. has cut down more than 60 million barrels since it last reached its peak number of stocks in March at 535 million barrels.
But the fact that is worth pointing out is that there is growing evidence that the decrease in the inventories will continue and might even accelerate. Evidence can further be found in the futures market, where changes in longer-dated contracts are no longer trading at a much high price than near-term prices.
The price of oil in the market has been stuck in a depressing state and it has continued to do so for the past three years. It may seem cryptic and even be brushed off as a financial nonsense, but this was a red flag that was warning investors that the market was suffering from a glut of supply.
In its essence, the front-month oil price was so discounted because there was too much oil moving around the globe. It is only expected that the downward trend in the market was the most pronounced when spot oil prices were in its lowest levels, such as in early 2016 when the West Texas Instrument plunged to an alarming $30 per barrel.
Nevertheless, the OPEC’s efforts to cut the oil supply is finally starting to take effect, and the futures market is starting to point market tightness, which is a sign of a stronger inventory declines which would eventually lead to higher more stable prices in the oil market.