Markets

Crude Hits 5-Month High: Is Oil Market Out of the Woods?

U.S. oil prices finished at their highest levels in five months after a weekly report from the Energy Information Administration ("EIA") showed a stockpile draw nearly twice above expectations. Additionally, the dollar-denominated commodity got a boost from a weaker greenback, news of progress on the next coronavirus relief package and an upbeat U.S. factory data.

On the New York Mercantile Exchange, WTI crude futures gained 49 cents, or 1.2%, to settle at $42.19 a barrel, the highest closing since Mar 6.

Analyzing the Latest EIA Report

Below we review the EIA's Weekly Petroleum Status Report for the week ending Jul 31.

Crude Oil: The federal government’s EIA report revealed that crude inventories fell by 7.4 million barrels compared to expectations of a 4.1 million barrel decline. A drop in production and slight uptick in refinery utilization accounted for the large stockpile draw with the world's biggest oil consumer. This puts total domestic stocks at 518.6 million barrels — 18.2% above the year-ago figure and 16% over the five-year average.

But on a slightly bearish note, the latest report showed that supplies at the Cushing terminal in Oklahoma (the key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange) were up 532,000 barrels to 52 million barrels.

The crude supply cover was down from 36.6 days in the previous week to 35.9 days. In the year-ago period, the supply cover was 25.4 days.

Let’s turn to products now.

Gasoline: Gasoline supplies increased for the second week in a row. The fuel’s 419,000 barrel addition is attributable to weaker demand and higher production. Analysts had forecast a decline of 1.3 million barrels. At 247.8 million barrels, the current stock of the most-widely used petroleum product is 5.4% higher than the year-earlier level and is 8% above the five-year average range.

Distillate: Distillate fuel supplies (including diesel and heating oil) increased for the 15th time in 18 weeks. The 1.6 million barrels build reflected rising production. Meanwhile, the market had been looking for a supply increase of 100,000 barrels. Current inventories — at 180 million barrels — are at their highest in 38 years, 30.9% over the year-ago level and 27% above the five-year average.

Refinery Rates: Refinery utilization ticked up 0.1% from the prior week to 79.6%. 

Conclusion

Oil markets found support from the massive drop in inventories, even though gasoline and distillates stockpiles rose. In fact, fuel supplies have been going up for most of the time since the coronavirus pandemic struck in early 2020, destroying consumption amid chronic oversupply. Investors remain worried over the continued rise in gasoline and distillate stocks, a signal that demand improvements have been slow.   

Again, despite another rise in refinery runs, utilization in the United States remains far below the usual capacity usage at this time of the year. Downstream operators including PBF Energy PBF, Valero Energy VLO, and Phillips 66 PSX have drastically reduced processing capacity to cope with the demand erosion caused by efforts to stem the spread of the coronavirus. Demand has still not picked up to a level where the operators think of restarting/increasing their refinery work. Meanwhile, Marathon Petroleum MPC has announced plans to indefinitely stop production at its Gallup and Martinez refineries in response to collapsing product demand.

Crude is also being pressured by the fresh wave of coronavirus infections. As several U.S. states experience a spike in new coronavirus infections and hospitalization, there are apprehensions about another set of containment measures — already in place in certain regions — which might force many businesses to close again just after reopening. Moreover, this would create doubts over the trajectory of oil’s demand recovery.

Further complicating things, crude’s rise from the bottom could also encourage the shale patch to ramp up or resume drilling activities. In fact, the sharp gains in the price have already prompted the likes of Continental Resources CLR and Parsley Energy PE — both carrying a Zacks Rank #3 (Hold) — to plan for a potential revival of production.  

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

As things stand right now, it appears that the oil market is at a crossroads with serious questions remaining about the future direction of the commodity.

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