May 6, 2021 [Reuters] – Crude oil storage tanks are seen in an aerial photograph at the Cushing oil hub in Cushing, Oklahoma, U.S. April 21, 2020.

U.S. petroleum inventories have returned to normal after ballooning during the Saudi-Russian volume war and first wave of the coronavirus epidemic last year.

Total stocks of crude oil and refined products outside the Strategic Petroleum Reserve last week were just 17 million barrels, or 1.4%, above the pre-epidemic five-year average for 2015-2019.

Small remaining surpluses to the five-year average in both crude (7 million barrels) and products (11 million barrels) were not significant given the historic volatility in both time series.

Surpluses in crude (75 million barrels) and products (101 million barrels) have shrunk since peaking at the end of June last year (“Weekly petroleum status report”, U.S. Energy Information Administration, May 5).

Excess stocks have been absorbed as a result of lower production by OPEC+ and U.S. shale firms, and the recovery in oil consumption.

In consequence, Brent spot prices are now trading at or slightly above their long-term average in real terms reflecting the rebalancing of the market.

And Brent’s six-month calendar spread has moved into a significant backwardation, well above its long-term average, as traders anticipate stocks will move through balance to below normal in the second half of the year.

On the U.S. Gulf Coast, the major refining hub and centre for seaborne oil pricing in North America, commercial crude stocks are still roughly 14 million barrels, or 5%, above the pre-epidemic five-year average.

But the regional surplus has shrunk from 76 million barrels or 33% in early July and the increase compared with the five-year average is below the trend in recent years.

Gulf Coast refineries and storage terminals are connected to the Brent market so the emptying of local tank farms has boosted spot prices and calendar spreads.

The reduction of petroleum inventories in the United States is part of a broader normalisation across all OECD countries.

If there are still excess stocks after last year’s bloat, they are in non-OECD countries, especially China, where they are unlikely to be available to the market and have a limited impact on prices.

Thirteen months after the worst overproduction crisis in the oil industry’s history, the market has largely returned to normal, much faster than many analysts predicted at the time, but in line with previous boom-bust cycles.

The critical exception is the market for jet fuel, where continued restrictions on international passenger aviation continue to depress global oil consumption by several million barrels per day.

Final normalisation, including a return to pre-epidemic production by OPEC+ and U.S. shale producers, depends on the timing and scale of a return to passenger flying.

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