Persistent Global Supply Overhang Bears Down on Oil Prices
Wednesday morning, oil prices had a short-lived rally just after the Energy Information Agency (EIA) released its Weekly Petroleum Status Report for the week ending Feb. 5, which showed a surprise decrease to crude inventories of 754,000 barrels (versus expectations for a build of 3.7 million barrels). Prices, however, soon lost strength after traders read through the headline numbers, which showed a build of crude inventories at Cushing, OK (the delivery point for the WTI contract) of 500,000 barrels, and increases to both gasoline and distillate stocks (which includes diesel and heating oil). Gasoline inventories rose by 1.3 million barrels (versus analyst expectations of a 1 million barrel increase); while distillate inventories showed an unexpected rise of 1.3 million barrels (versus analyst estimates for a draw of 900,000 barrels).
The surprise draw in U.S. crude inventories was most likely related to a 1.1 million barrel drop in imports week/week, and was not necessarily indicative of an uptick in demand. For the week ending Feb. 5, the EIA reported that the U.S. refinery utilization rate decreased to 86.1 percent from 86.6 percent, with gross inputs to the country’s refining complex down from 15.6 to 15.5 million barrels per day (to be expected as we enter into the seasonal maintenance period when capacity comes offline and crude demand falls, as a result).
In what turned out to be a day of choppy trading, the front-month WTI contract settled down on the NYMEX about 1.8 percent at $27.45/bbl, while the Brent front-month contract rose by 1.7 percent on the ICE to $30.84/bbl.
In early trading Wednesday, oil continued its downward trend from the day before, after OPEC released its estimates that global crude demand was faltering due to weakened consumption in places like Brazil and Russia. Interestingly, in what appears to be a negative feedback loop, we are seeing that commodity-driven/producer economies (like Brazil and Russia) are driving down global demand expectations for oil because of the net impact that lower oil prices have had on their export-led economies, which has left consumers in these nations with less cash in their pockets. In countries where consumers have historically relied on subsidies for petroleum products, namely in some Middle Eastern countries, that benefit has been cut in certain instances. To this end, it is the view of many in the market that lower oil prices (which had the knock-on effect of lowering petroleum product prices, thus leading to an uptick in consumption in 2015) has been finally played out.
Oil markets had fallen to five-month lows Tuesday off a dismal report from the International Energy Agency (IEA) that estimated the global supply glut could worsen in 2016 – primarily due to increased OPEC crude production, which renewed bearish sentiment among traders. With no visible potential positive catalysts for crude in the next 18-month period, oil traded down Tuesday (the front-month contract for WTI fell 3.4 percent on the NYMEX to $27.94/bbl, while the front-month contract for Brent fell more than 10 percent on the ICE to $30.32/bbl).
Compounding the dim view for oil was the release Tuesday of the EIA’s closely-watched Short-Term Energy Outlook Report. In it, the EIA lowered estimates from the month prior’s report for the average 2016 Brent spot price (from $41/bbl to $38/bbl), and for WTI (from $39/bbl to $38/bbl). After the market close Tuesday, the American Petroleum Institute (API) substantiated the market’s fears that U.S. crude inventories had swelled to historic levels, when it released its inventory estimates for the week ending Feb. 5. The API reported that crude inventories had risen by 2.4 million barrels.
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