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Crude Sell-Off Deepens As EIA Reports First Build in 7 Weeks

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U.S. oil stocks rose last week, breaking the six-week streak of declines. Meanwhile, product demand weakened and refinery runs dropped, pointing to an oversupply situation, data from the Energy Information Administration showed on Thursday.

On the New York Mercantile Exchange, WTI crude futures lost 75 cents or 2%, to settle at $37.30 a barrel yesterday. In fact, the latest bout of sell-off has pushed the benchmark into correction territory with the contract down more than 14% since its Aug 26 high.

Investors Dump Energy Stocks

The federal data sparked widespread selling in energy stocks, which pushed the Energy Select Sector SPDR — an assortment of the largest U.S. energy companies — down nearly 4% on Thursday. Consequently, the seven biggest casualties of the S&P 500 were energy-related names — EOG Resources (EOG - Free Report) , Apache Corporation, Occidental Petroleum (OXY - Free Report) , Devon Energy (DVN - Free Report) , Hess (HES - Free Report) , Concho Resources (CXO - Free Report) and Diamondback Energy (FANG - Free Report) .

Analyzing the Latest EIA Report

Below we review the EIA's Weekly Petroleum Status Report for the week ending Sep 4.

Crude Oil: The federal government’s EIA report revealed that crude inventories rose by 2 million barrels compared to expectations of a 500,000-barrel decline. The combination of a rebound in domestic production from Hurricane Laura-led shut-ins and weaker refining activity on account of the storm-related closures accounted for the unexpected stockpile build — the first addition after six consecutive weeks of declines — with the world's biggest oil consumer. This puts total domestic stocks at 500.4 million barrels — 20.3% higher than the year-ago figure and 14% higher than the five-year average.

On a further 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) increased 1.8 million barrels to 54.4 million.

The crude supply cover was up from 34.5 days in the previous week to 35.8 days. In the year-ago period, the supply cover was 23.8 days.

Let’s turn to products now.

Gasoline: Gasoline supplies decreased for the fifth week in a row. The 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 the coronavirus blues. Analysts had forecast a decline of 2.5 million barrels. At 231.9 million barrels, the current stock of the mostwidely used petroleum product is 1.3% higher than the year-earlier level and 3% above the five-year average range.

Distillate: Distillate fuel supplies (including diesel and heating oil) decreased for just the sixth time in 23 weeks. The 1.7-million-barrel draw reflected refineries sidelined by Hurricane Laura. Meanwhile, the market looked for a supply gain of 300,000 barrels. Current inventories — at 175.8 million barrels — are 29.1% higher than the year-ago level and 20% higher than the five-year average.

Refinery Rates: Refinery utilization was down 4.9% from the prior week to 71.8%.

Refinery Maintenance Season to Bring More Pain

Of late, investors have turned their attention to the dip in gasoline demand casting a cloud over a recovery. To put it simply, even though gasoline consumption has improved from their pandemic-lows, they remain weak. Refinery utilization in the United States remains far below the usual capacity usage at this time of the year. Moreover, with the onset of the refinery maintenance season, traders expect the glut to worsen.

As a proof of the bearish environment, downstream operators including PBF Energy, Valero Energy and Phillips 66 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 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.

A period of sustained low usage of the fuel would create a new headwind for the commodity.

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