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Oil Prices Mark Highest Finish in 4 Months on Big Supply Drop
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U.S. oil prices finished at their highest in four months after a weekly report from the Energy Information Administration ("EIA") showed a stockpile draw thrice above expectations. The decline in oil inventories was the largest so far this year, and came in tandem with a fall in gasoline and distillate supplies.
The commodity also got a boost from reports that the OPEC+ group will ask member countries to compensate for earlier non-compliance in August and September, which is likely to cushion the impact of next month’s planned relaxation in production cuts.
On the New York Mercantile Exchange, WTI crude futures gained 91 cents, or 2.3%, to settle at $41.20 a barrel, the highest settlement since Mar 6.
Analyzing the Latest EIA Report
Below we review the EIA's Weekly Petroleum Status Report for the week ending Jul 10.
Crude Oil: The federal government’s EIA report revealed that crude inventories fell by 7.5 million barrels, compared to expectations for a 2.1 million barrels decrease. A sharp drop in imports and hefty increase in exports accounted for the year’s largest stockpile decrease with the world's biggest oil consumer. This puts total domestic stocks at 531.7 million barrels – 16.6% above the year-ago figure and 17% 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) was up 949,000 barrels to 48.7 million barrels.
The crude supply cover was down from 38.6 days in the previous week to 37.6 days. In the year-ago period, the supply cover was 26.3 days.
Let’s turn to products now.
Gasoline: Gasoline supplies tallied a decrease for the fourth time in five weeks. The fuel’s 3.1 million barrels decline is attributable to lower imports. Analysts had forecast 2 million barrels fall. At 248.5 million barrels, the current stock of the most widely used petroleum product is 6.7% higher than the year-earlier level and is 7% above the five-year average range.
Distillate: Distillate fuel supplies (including diesel and heating oil) fell for just the third time in 15 weeks. The 453,000 barrels decrease reflected a pick-up in consumption, which has been badly hit by the coronavirus crisis. Meanwhile, the market had been looking for a supply climb of 1.1 million barrels. Current supplies — at 176.8 million barrels — are 29.8% over the year-ago level and 26% above the five-year average.
Refinery Rates: Refinery utilization was up 0.6% from the prior week to 78.1%.
Conclusion
Oil markets got a welcome boost from the massive drop in crude inventories. Another piece of optimistic news was the fall in gasoline and distillate inventories.
Further, though domestic output was flat week over week, the fact remains that U.S. producers have scaled back operations significantly. Weekly figures show current output at 11 million barrels per day, down from 13.1 million in the second week of March.
In particular, volumes from United States’ number one basin — Permian - is set to fall by 13,000 bbl/d month over month to 4.2 MMbbl/d in August — the fourth month of decline, as the likes of Diamondback Energy, Cimarex Energy , Concho Resources, Pioneer Natural Resources (PXD - Free Report) and others invest a lot less money into the unconventional play in 2020.
However, a potential headwind to come out of the report was an increase in storage at the Cushing hub, which rose for the second successive week. As it is, investors still remain worried of the supply glut. In total, U.S. commercial stockpiles are up by nearly 18% since March, while domestic fuel demand, though improving, remains weak. The U.S. data also showed a fall in gasoline demand, underscoring worries about the nascent rebound.
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 Valero Energy (VLO - Free Report) , Marathon Petroleum (MPC - Free Report) , HollyFrontier – all carrying a Zacks Rank #3 (Hold) - have drastically reduced processing capacity to cope with the demand erosion caused by efforts to stem the spread of the coronavirus. The demand has still not picked up to a level where the operators think of restarting/increasing their refinery work.
Crude is also being pressured by the second 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 around 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 EOG Resources (EOG - Free Report) and Parsley Energy to plan for potential revival of production.
Therefore, it appears that the oil market is at a crossroads where any direction is possible. Over the past few weeks, large but opposing forces have kept WTI hovering around $40 per barrel.
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Oil Prices Mark Highest Finish in 4 Months on Big Supply Drop
U.S. oil prices finished at their highest in four months after a weekly report from the Energy Information Administration ("EIA") showed a stockpile draw thrice above expectations. The decline in oil inventories was the largest so far this year, and came in tandem with a fall in gasoline and distillate supplies.
The commodity also got a boost from reports that the OPEC+ group will ask member countries to compensate for earlier non-compliance in August and September, which is likely to cushion the impact of next month’s planned relaxation in production cuts.
On the New York Mercantile Exchange, WTI crude futures gained 91 cents, or 2.3%, to settle at $41.20 a barrel, the highest settlement since Mar 6.
Analyzing the Latest EIA Report
Below we review the EIA's Weekly Petroleum Status Report for the week ending Jul 10.
Crude Oil: The federal government’s EIA report revealed that crude inventories fell by 7.5 million barrels, compared to expectations for a 2.1 million barrels decrease. A sharp drop in imports and hefty increase in exports accounted for the year’s largest stockpile decrease with the world's biggest oil consumer. This puts total domestic stocks at 531.7 million barrels – 16.6% above the year-ago figure and 17% 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) was up 949,000 barrels to 48.7 million barrels.
The crude supply cover was down from 38.6 days in the previous week to 37.6 days. In the year-ago period, the supply cover was 26.3 days.
Let’s turn to products now.
Gasoline: Gasoline supplies tallied a decrease for the fourth time in five weeks. The fuel’s 3.1 million barrels decline is attributable to lower imports. Analysts had forecast 2 million barrels fall. At 248.5 million barrels, the current stock of the most widely used petroleum product is 6.7% higher than the year-earlier level and is 7% above the five-year average range.
Distillate: Distillate fuel supplies (including diesel and heating oil) fell for just the third time in 15 weeks. The 453,000 barrels decrease reflected a pick-up in consumption, which has been badly hit by the coronavirus crisis. Meanwhile, the market had been looking for a supply climb of 1.1 million barrels. Current supplies — at 176.8 million barrels — are 29.8% over the year-ago level and 26% above the five-year average.
Refinery Rates: Refinery utilization was up 0.6% from the prior week to 78.1%.
Conclusion
Oil markets got a welcome boost from the massive drop in crude inventories. Another piece of optimistic news was the fall in gasoline and distillate inventories.
Further, though domestic output was flat week over week, the fact remains that U.S. producers have scaled back operations significantly. Weekly figures show current output at 11 million barrels per day, down from 13.1 million in the second week of March.
In particular, volumes from United States’ number one basin — Permian - is set to fall by 13,000 bbl/d month over month to 4.2 MMbbl/d in August — the fourth month of decline, as the likes of Diamondback Energy, Cimarex Energy , Concho Resources, Pioneer Natural Resources (PXD - Free Report) and others invest a lot less money into the unconventional play in 2020.
However, a potential headwind to come out of the report was an increase in storage at the Cushing hub, which rose for the second successive week. As it is, investors still remain worried of the supply glut. In total, U.S. commercial stockpiles are up by nearly 18% since March, while domestic fuel demand, though improving, remains weak. The U.S. data also showed a fall in gasoline demand, underscoring worries about the nascent rebound.
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 Valero Energy (VLO - Free Report) , Marathon Petroleum (MPC - Free Report) , HollyFrontier – all carrying a Zacks Rank #3 (Hold) - have drastically reduced processing capacity to cope with the demand erosion caused by efforts to stem the spread of the coronavirus. The demand has still not picked up to a level where the operators think of restarting/increasing their refinery work.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Crude is also being pressured by the second 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 around 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 EOG Resources (EOG - Free Report) and Parsley Energy to plan for potential revival of production.
Therefore, it appears that the oil market is at a crossroads where any direction is possible. Over the past few weeks, large but opposing forces have kept WTI hovering around $40 per barrel.
Breakout Biotech Stocks with Triple-Digit Profit Potential
The biotech sector is projected to surge beyond $775 billion by 2024 as scientists develop treatments for thousands of diseases. They’re also finding ways to edit the human genome to literally erase our vulnerability to these diseases.
Zacks has just released Century of Biology: 7 Biotech Stocks to Buy Right Now to help investors profit from 7 stocks poised for outperformance. Our recent biotech recommendations have produced gains of +50%, +83% and +164% in as little as 2 months. The stocks in this report could perform even better.
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