Crude oil prices are attempting to find a bottom, despite robust inventories which have placed U.S. stocks at all-time highs. Prices in February hit 12-year lows as demand for distillates which include heating oil slumped 15% on a year over year basis. What has been appreciate has been the slow increase in gasoline demand which has improved over the later part of the Q1.

Prices began to break out and eventual moved through resistance levels following a report from the International Energy Agency that said that prices may have “bottomed out”. The energy body still said, however, that it will take until 2017 for demand and supply to find better equilibrium, and that any potential agreement among oil producers to freeze supplies was unlikely to impact until the second half of 2016. On the demand side, the IEA said foundations are sound, but not solid.

Of course there are always multiple views on the future direction of oil prices. Despite the IEA call for higher prices, the EIA sees inventories as a major obstacle which should cap prices from moving higher. According to the Energy Information Administration, U.S. crude oil production averaged an estimated 9.4 million barrels per day in 2015, and it is forecast to average 8.7 million barrels per day in 2016 and 8.2 million barrels per day in 2017. EIA estimates that crude oil production in February averaged 9.1 million barrels per day, which was 80,000 barrels per day below the January level.

Despite recent declines in production and rig count declines, inventories are at record highs in the United States. In its most recent estimate the EIA reported that U.S. commercial crude oil inventories excluding those in the Strategic Petroleum Reserve, increased by 3.9 million barrels from the previous week. At 521.9 million barrels, U.S. crude oil inventories are at historically high levels for this time of year.

Despite the recent call by the IEA of a bottom, the Energy Department is calling for lower prices in 2016. In its latest Short-Term Energy Outlook released on March 8, the EIA forecasts that North Sea Brent and WTI crude oil prices will average $34 per barrel in 2016 and $40 in 2017, $3 per barrel and $10 per barrel lower, respectively, than expected in last month’s short term energy outlook. It appears that the EIA is focused on the supply and demand imbalance and believes prices will remain subdued until inventories roll off.

According to the EIA, the lowering of the price forecast reflects oil production that has been more resilient than expected in a low-price environment and reduced expectations for oil demand growth. The resulting inventory builds are larger than previously expected throughout the forecast period, thus delaying the expected rebalancing of the oil market and contributing to lower forecast oil prices.

The increased inventory builds are a major source of uncertainty in the price forecast. If global storage capacity becomes stressed, the cost of storage will rise to reflect more expensive marginal storage options such as floating inventories on crude oil tankers. Higher storage costs would tend to divert volumes that would otherwise be stored into the spot market, reducing near-month crude oil prices. Additional uncertainty stems from the pace of global economic growth and its contribution to oil demand growth, and the responsiveness of non-OPEC producers to sustained low oil prices.

The real question is whether the trajectory of inventory builds will decline and quickly shed the large overhang. Drilling rigs have decline rapidly during the Q1, but production has remain stable making it difficult to see a drop in crude oil stocks.