Crude oil prices are on the rise. They are rebounding in August following one of the largest monthly declines experienced in the last month.  Crude oil dropped nearly 9% in July as hedge funds exited long positions, following news that OPEC production was larger than expected.  Hedge funds remain long, but inventory data continues to show that stockpiles are dwindling ahead of Iranian sanctions that could further erode global inventories. The dollar has also been a headwind for crude oil prices. Since crude oil is priced in US dollars, a stronger greenback makes prices less attractive in other currencies. This puts downward pressure on crude oil.

Sanctions on Iran are Set to Take Hold

Sanctions that are set to take hold in November are beginning to take their toll on crude oil inventories. Experts are predicting that sanctions on Iran could take more than 1-million barrels a day off the markets. Crude oil prices have remained in a $74 to $65 range while trades attempt to determine how sanctions will affect the crude oil market.  After dropping to the bottom end of the range, prices are now rebounding.

Crude Oil Inventories Decline More than Expected

The American Petroleum Institute revealed that crude oil inventories dropped more than expected, declining by 5.17 million barrels during the week ending August 18, 2018. This can be compared to analyst expectations that inventories would decline by approximately 1.5 million barrels during the week. As the calendar moves toward the end of the US driving season, inventories should decline by smaller amounts, as refiners move toward maintenance.

The large decline offsets last week’s larger than expected build reported by the American Petroleum Institute.  Last week the API reported a rise in stockpiles by 3.6 million barrels.  In addition, the Department of Energy also reported a larger than expected crude oil build.  The API also reported a draw in gasoline inventories for the week ending August 18, 2018.  Stockpiles of gasoline declined by 0.93 million barrels.  Expectations were for a smaller 0.5 million barrel draw.

Distillate inventories, which include crude oil products such as diesel and heating oil, increased last week climbing by 1.8 million barrels. According to expectations, they were to rise by 1.5 million barrels.  Additionally, crude oil that is delivered in Cushing Oklahoma, where WTI is priced, increased by approximately 0.2 million barrels for the week.

Robust Production Remains Stable

After rising to 11 million barrels a day, production in the US has dropped off slightly.  The EIA reported last week that US production rebounded from 10.8 million barrels to 10.9 million barrels. Prices at this point are playing a large role in determining production. US production hit its high when prices were above $74 per barrel, and dropped off as prices slid back toward $65 per barrel.  Rig counts in the US also remain elevated on a year over year basis, meaning that forward-looking production is on the rise. The dollar is also playing a role in the price of crude oil.  Dollar momentum has retreated in recent days as President Trump attempts to talk down the value of the greenback.