Oil prices had a great rally since the lows of February, and closed above $50 per barrel for several days in early June. But the price of West Texas Intermediate (WTI) peaked during the second week in June, and it has steadily declined on a weekly basis since:

Why has this happened? There are two major reasons.

The first is that crude and product inventories remain uncomfortably high. While we have focused a lot on crude oil inventories, finished product inventories have been growing for months. Globally, they are more than 10% higher than a year ago. In the U.S., despite record demand for gasoline, record production has ensured that gasoline inventories are well above seasonal norms:

This has refiners talking about paring back production, which will obviously reduce their need for crude oil in the short term. That has put downward pressure on oil prices.

The other major downward catalyst was the June 23 referendum in the U.K., won by those who favor exiting the European Union. This has significantly strengthened the U.S. dollar against many world currencies. Since most of the world’s oil trade is priced in dollars, a stronger dollar means many countries are paying more in local currency for their oil.

How has this affected the global supply/demand picture? A year ago it was projected that supply and demand would come back into balance in the second half of 2016. Now those projections have been pushed out to early 2017:

Annual demand is projected to continue to grow robustly (with occasional hiccups), while supply is expected to be stagnant over the next year. But given the tremendous inventory overhang, conditions are likely to remain difficult for the next one or two quarters for oil producers, and potentially even longer for refiners.

As I have noted on several occasions, I don’t expect that we will revisit the lower $30s for a barrel of oil. If we do that level will present an excellent buying opportunity, as it did earlier this year, given the long-term picture.

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