US crude oil inventories fell sharply by 11.5 million barrels last week, marking the largest drop in almost a year. This decline was mainly due to a decrease in net imports of 1.8 million barrels per day, caused by lower imports and higher exports. Exports increased even with the smaller price difference between WTI and Brent, which narrowed to just $2.5 per barrel at the week’s start—the lowest this year. This indicates that exports might not stay at this level, suggesting a potential reversal in inventory reduction.

Tight Supply Situation

Currently, US crude oil inventories are 10% below the 5-year average, indicating a tight supply. In Cushing, the level is even lower, around 40% below the average, which means WTI prices are getting closer to Brent prices. The big drop in US crude inventories—11.5 million barrels—isn’t just about higher demand or seasonal changes. The main factor seems to be the sharp decline in net imports, which dropped by 1.8 million barrels a day. This means fewer barrels are coming in, and more are going out of the country. This situation usually doesn’t last long, especially as the price differences begin to close. It was surprising to see exports rise even with such a small price gap of $2.5 per barrel between WTI and Brent at the start of the week. At this narrow spread, there’s little motivation for international buyers to prefer WTI over Brent. This is the smallest difference we’ve seen this year, removing the usual incentives for exports. It suggests that the current export levels might not be sustainable. If the price gap stays this narrow—or gets even smaller—traders who are hoping for lower US inventories might find themselves unprepared if exports drop.

Regional Pricing Dynamics

The inventory gap is becoming serious. Stocks are now about 10% below the 5-year average, which raises pressure on local supply and supports higher US crude prices, especially during the busy summer months. The situation in Cushing is even more alarming, as inventory levels there are roughly 40% below the 5-year norm, causing WTI to trade closer to Brent than it has for some time. Such a change occurs only when supply at the delivery hub starts to affect prices more than global movements. With such low stock in Cushing, any supply issues—like pipeline disruptions, refinery changes, or weather disturbances in the Gulf—could impact futures prices. In the near term, we may see more focus on regional price differences rather than relying heavily on international benchmarks for domestic assessments. WTI’s closeness to Brent reflects not just a shortage but also traders adjusting to increased price pressures from within the US rather than looking overseas. Given the current situation, it’s crucial to monitor forward pricing trends, export volumes, and any changes at coastal terminals that might indicate whether export pressure is easing. If it does, the sharp inventory drop could level off—or even reverse—bringing net imports back to more balanced levels. Until then, pricing risks lean towards low inventories and ongoing short-term price increases. Short call spreads might feel more vulnerable, especially if lower Midwest stocks continue to decline. Additionally, any strategies based on a growing export margin could struggle as the Brent-WTI spread remains narrow. We’ll need to keep an eye on weekly Energy Information Administration reports—not just for the overall crude change, but for regional stock variations and total exports. If flows through the Gulf Coast begin to slow, current long positions will need protection. Otherwise, being overly exposed without hedging could quickly lead to losses. Create your live VT Markets account and start trading now.

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