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Oil Prices Hit 5-Month High Following Another Inventory Drop

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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 third in as many weeks and came in tandem with a fall in gasoline and distillate supplies.

On the New York Mercantile Exchange, WTI crude futures gained $1.06, or 2.6%, to settle at $42.67 a barrel, the highest closing since Mar 5.

Analyzing the Latest EIA Report

Below we review the EIA's Weekly Petroleum Status Report for the week ending Aug 7.

Crude Oil: The federal government’s EIA report revealed that crude inventories fell by 4.5 million barrels compared to expectations of a 4.7 million barrel decline. A sharp drop in production, uptick in refinery utilization and higher exports accounted for the third-straight weekly stockpile draw with the world's biggest oil consumer. This puts total domestic stocks at 514.1 million barrels — 16.7% above the year-ago figure and 15% higher than 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 1.3 million barrels to 53.3 million barrels.

The crude supply cover was down from 35.9 days in the previous week to 35.4 days. In the year-ago period, the supply cover was 25.5 days.

Let’s turn to products now.

Gasoline: Gasoline supplies decreased for the first time in three weeks. The fuel’s 722,000 barrel draw is attributable to stronger demand. Analysts had forecast a decline of 2.1 million barrels. At 247.1 million barrels, the current stock of the most widely used petroleum product is 5.7% higher than the year-earlier level and is 8% above the five-year average range.

Distillate: Distillate fuel supplies (including diesel and heating oil) decreased for just the fourth time in 19 weeks. The 2.3 million barrels decline reflected rising demand. Meanwhile, the market looked for a supply cut of 100,000 barrels. Current inventories — at 177.7 million barrels — are 31.1% higher than the year-ago level and 24% more than the five-year average.

Refinery Rates: Refinery utilization was up 1.4% from the prior week to 81%. 

Conclusion

Oil markets found support from the continued drop in crude inventories. Another piece of optimistic news was the fall in gasoline and distillate inventories — a signal of demand improvement. The report was also supportive in terms of U.S. producers scaling back operations. Weekly figures show output has dropped to 10.7 million barrels per day, since reaching 13.1 million in the second week of March.

In particular, volumes from the United States’ number one basin — Permian — is forecast to fall by 13,000 bbl/d month over month to 4.2 MMbbl/d in August, suggesting the fourth month of decline, as the likes of Diamondback Energy (FANG - Free Report) , Cimarex Energy, Concho Resources, Pioneer Natural Resources and others have invested a lot less money in the unconventional play in 2020.

However, a potential headwind that came out of the report was an increase in storage at the Cushing hub, which has been rising since July.

Again, despite another rise in refinery runs that took it past 80% for the first time in five months, utilization in the United States remains far below the usual capacity usage at this time of the year. Downstream operators including PBF Energy (PBF - Free Report) , Valero Energy (VLO - Free Report) and Phillips 66 (PSX - Free Report) 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 can think of restarting/increasing their refinery work. Meanwhile, Marathon Petroleum (MPC - Free Report) 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 - Free Report) and Parsley Energy — both carrying a Zacks Rank #3 (Hold) — to plan a 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 about the future direction of the commodity.

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