In March, there was a lot of volatility around the price of oil, “led by data out of the U.S. with respect to inventory levels,” says Scott Vali, vice-president of equity for CIBC Asset Management.
“If you think about the U.S., it’s where we get the most [oil] data. We get that data on a weekly basis, continuously, to show [whether] inventories are building at the current time,” says Vali, who manages the Renaissance Global Resources Fund. “But, that data is comprised of a lot of different inputs: inventory levels, imports [and] exports out of the U.S.”
In addition, oil prices can be affected by the demand and production capacity of refineries. Vali notes that, as of the week of March 6, inventory levels were building because of increasing imports. Then, during the week of March 13, he says, “we saw inventories draw because of lack of imports.”
This shows you that “import data can be very volatile and, on a weekly basis, doesn’t really tell you much,” says Vali.
Also consider that “we’re in what is seasonally a really weak period for refinery demand.” In March, refineries were conducting mid-winter maintenance and that affected their production capacity. “Typically during the mid-season, refiners will update their equipment and prepare themselves for the demand for gasoline in the summer months. There’s also a winter-grade and summer-grade gasoline,” he adds, and both have “different specifications [that] has to do with the coldness of the outdoor temperature.”
Since March saw weak demand, production fell “by about 1.5 million barrels per day,” says Vali, who explains, “Between [March] and the beginning of April, that will fall to 400,000 barrels a day of capacity offline, [meaning] we’re going to have an additional 1.1 million barrels a day of demand for oil in the U.S., simply because of the seasonal change in the refining systems’ utilization.”
Until now, crude oil inventory increased while gasoline inventory dropped, but he predicts that trend will reverse as we head into summer.
Watch global indicators
Vali also watches for trends outside North America that can affect oil prices. He follows Brent time spreads, which show the difference between the value of Brent oil in the one-month period relative to where it trades six months out.
“Those spread have been narrowing, and what that signals is that near-month demand is actually increasing,” he says. “As we see that continue to narrow, that signals to us that the market is getting tighter.”
And, a tightening oil market is positive, says Vali. “That’s exactly what we want to see because remember, it’s OPEC that is cutting production, not the U.S. So, although a lot of people are focused on U.S. data, it doesn’t tell you the global story.”
Typically, he explains, consider that when refinery maintenance is at its highest, “speculation in the market is also at an all-time high,” which can lead to volatility. In March, he found “speculators [had] bought crude contracts with the expectation that prices would start to rise. As such, they were getting nervous as we went further into the season and continued to see crude inventories build.”