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Key Reasons for Oil's Lowest Settlement in Nearly a Month

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U.S. oil prices finished at their lowest levels in nearly a month, as investors looked past the Energy Information Administration’s ("EIA") storm-induced 9.4 million barrel draw in crude stockpiles and turned their attention to the dip in gasoline demand casting a cloud over a recovery.

On the New York Mercantile Exchange, WTI crude futures lost $1.25 or 2.9%, to settle at $41.51 a barrel yesterday, the worst closing since early August.

Analyzing the Latest EIA Report

Below we review the EIA's Weekly Petroleum Status Report for the week ending Aug 28.

Crude Oil: The federal government’s EIA report revealed that crude inventories fell by 9.4 million barrels compared to expectations of a 1.2-million-barrel decline. The combination of a record drop in domestic production (by 1.1 million barrels per day, the most since 1983), lower imports and weaker refinery activity — all related to the Hurricane Laura-led shut-ins in the Gulf of Mexico upstream and downstream facilities —accounted for the sixth-straight weekly stockpile draw with the world's biggest oil consumer. This puts total domestic stocks at 498.4 million barrels — 17.8% above the year-ago figure and 14% higher than the five-year average.

But on a 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 110,000 barrels to 53.3 million barrels.

The crude supply cover was down from 34.7 days in the previous week to 34.5 days. In the year-ago period, the supply cover was 24.2 days.

Let’s turn to products now.

Gasoline: Gasoline supplies decreased for the fourth week in a row. The 4.3-million-barrel draw on hurricane fallout notwithstanding, the fall in the fuel’s consumption over the latest week is interpreted as a slower-than-expected recovery from coronavirus blues. Analysts had forecast a decline of 4.7 million barrels. At 234.9 million barrels, the current stock of the most widely used petroleum product is 2.3% higher than the year-earlier level and 4% above the five-year average range.

Distillate: Distillate fuel supplies (including diesel and heating oil) decreased for just the fifth time in 22 weeks. The 1.7-million-barrel draw reflected refineries sidelined by Hurricane Laura. Meanwhile, the market looked for a supply cut of 900,000 barrels. Current inventories — at 177.5 million barrels — are 33% higher than the year-ago level and 23% higher than the five-year average.

Refinery Rates: Refinery utilization was down 5.3% from the prior week to 76.7%.

Investors Fret About the Weakness in Gasoline Demand

While U.S. crude inventories shed a massive 9.4 million barrels for the week ended Aug 28 and output sank to its lowest since January 2018, analysts cited the declines as temporary as most production platforms in the Gulf were evacuated in anticipation of Hurricane Laura. In fact, the storm-impacted numbers were overshadowed by the slipping gasoline demand, which was down 375,000 barrels per day from a week earlier. Already, refinery utilization in the United States remains far below the usual capacity usage at this time of the year.

As a proof of the bearish environment, 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 the 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) announced its plan to indefinitely stop production at its Gallup and Martinez refineries in response to collapsing product demand. More recently, Zacks Rank #2 (Buy) Royal Dutch Shell (RDS.A - Free Report) said that it will cease operation at its 110,000 barrel-a-day refinery in the Philippines.

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

To put it simply, even though gasoline demand has improved from their pandemic-lows, they remain weak. A period of sustained low usage of the fuel would create a new headwind for the commodity.

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