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Supply Drop, Hurricane Danger Lift Oil Prices to 5-Month High

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. The decline in oil inventories was the fifth in as many weeks and came in tandem with a fall in gasoline supplies.

Prices were already gaining over the past few days as the oil market braced itself for potential supply disruptions from Hurricane Laura, which hit the U.S. Gulf Coast — responsible for 17% of the nation’s total oil production and nearly half of its refining capacity — earlier today. Energy companies including ExxonMobil XOM, Chevron CVX, Royal Dutch Shell RDS.A, BP plc BP have shut down offshore oil and gas platforms, with Louisiana and Texas set to take the impact of this Category 4 storm.

On the New York Mercantile Exchange, WTI crude futures gained 4 cents, or 0.1%, to settle at $43.39 a barrel yesterday, the highest closing since early March.

Analyzing the Latest EIA Report

Below we review the EIA's Weekly Petroleum Status Report for the week ending Aug 21.

Crude Oil: The federal government’s EIA report revealed that crude inventories fell by 4.7 million barrels compared to expectations of a 4.3-million-barrel decline. The combination of a sizeable jump in exports — the most in 18 months — and a ramp up in refinery activity accounted for the fifth-straight weekly stockpile draw with the world's biggest oil consumer even as domestic production edged up. This puts total domestic stocks at 507.8 million barrels — 18.7% above the year-ago figure and 15% higher than the five-year average.

On a further positive 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 down 279,000 barrels to 52.4 million barrels.

The crude supply cover was down from 35.1 days in the previous week to 34.7 days. In the year-ago period, the supply cover was 24.4 days.

Let’s turn to products now.

Gasoline: Gasoline supplies decreased for the third week in a row. The fuel’s 4.6 million barrel draw is attributable a strong rebound in demand. Analysts had forecast a decline of 2.7 million barrels. At 239.2 million barrels, the current stock of the most widely used petroleum product is 3.1% higher than the year-earlier level and 5% above the five-year average range.

Distillate: Distillate fuel supplies (including diesel and heating oil) increased for the 17th time in 21 weeks. The 1.4-million-barrel build reflected higher production and imports even as demand strengthened. Meanwhile, the market looked for a supply cut of 700,000 barrels. Current inventories — at 179.2 million barrels — are 31.7% higher than the year-ago level and 24% more than the five-year average.

Refinery Rates: Refinery utilization was up1.1% from the prior week to 82%, the highest since March when the coronavirus-induced demand loss was at its peak.

Conclusion

Oil markets found support from the continued drop in crude inventories. Another piece of optimistic news was the fall in gasoline supplies, even though distillates stockpiles rose. Another potential tailwind that came out of the report was a decline in storage at the Cushing hub.

Amid the pockets of bullish data in the report, the spoiler was the recovery in U.S. oil production by 100,000 barrels a day. It gives credence to the theory that crude’s rise from the bottom has encouraged the shale patch to ramp up or resume some of its drilling activities.

Per the latest edition of the EIA’s Drilling Productivity Report, production in two of America’s biggest oil fields — Permian Basin in the western part of Texas and the south-eastern part of New Mexico, and Bakken in North Dakota — is making a comeback after months of bust.   

In particular, output from the United States’ number one basin — Permian — is expected to rise by 7 Mbbl/d month over month to 4,154 Mbbl/d in September, indicating the first increase in five months. With oil prices having rebounded from the coronavirus-induced lows in late April to more than $40 per barrel now, the likes of Parsley Energy PE and Pioneer Natural Resources PXD have brought some previously shut-in production back online.

In the Bakken region too, output is expected to edge higher by 7 Mbbl/d to 1,191 Mbbl/d in September with the Zacks Rank #3 (Hold) Continental Resources CLR restoring curtailed volumes.

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Chevron Corporation (CVX): Free Stock Analysis Report

Pioneer Natural Resources Company (PXD): Free Stock Analysis Report

BP p.l.c. (BP): Free Stock Analysis Report

Royal Dutch Shell PLC (RDS.A): Free Stock Analysis Report

Continental Resources, Inc. (CLR): Free Stock Analysis Report

Parsley Energy, Inc. (PE): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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