Crude oil's 'drain is clogged,' and it's heading into the worst time of the year

July was the worst month for crude oil in a year.

The usual seasonal boost in demand that could be helping prices is lackluster right now, wrote Barclays' Michael Cohen and his team in a note on Monday. This postpones any chances for the market to balance out, he said.

Summer is usually the best season of the year for excess inventories in both crude and refined products like gasoline to drop. After a few busy months of road trips, the oil market enters a so-called shoulder season, and refineries wind down to prepare for higher heating-oil demand.

US stockpiles are at the highest level for this time of year in at least two decades, according to Bloomberg. And inventories could build up even more during this period.

Here's Cohen (our emphasis):

"Strong gas oil and diesel demand used to provide 30-50% of global oil demand growth and the absence of positive growth leaves oil demand even more exposed to the ebb and flow of the summer driving and winter heating season.

When either of those seasons misses expectations, as it did with El Nino and with this summer, the market must begin anew the process of shoring up unused stocks. Moreover, as the uncertainty of Brexit and Fed hawkishness worsen the macroeconomic picture, observers should say goodbye to prospects of industrial led demand growth.

The hope for a clear rebalancing may have to wait a couple more months, since oil's drain is clogged in the meantime."

There are more structural issues outside the US, Cohen noted.

Refined-product inventories are high in Europe, and flooding in China could reduce demand, as pipelines are damaged and road travel is limited.

Also, Saudi Arabia has kept its exports of crude oil and refined products high, with exports up by more than 500,000 barrels per day year-over-year.

"The combination of weak non-OECD consumption, high non-OECD product exports, and an expected seasonal downtrend should see US refinery margins weaken further over this time," Cohen wrote.

"Refineries are going to find themselves in the line of fire," he added.

The benchmark US futures contract - West Texas Intermediate crude - fell 16% in July. On Monday, the contract for September delivery dropped 1.3% to $41.03 per barrel.

After supply disruptions in Canada and Nigeria helped lift prices above $50 per barrel in June, investors returned their focus to the high levels of output and inventories.