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Oil Posts a Quarterly Gain as Supplies Fall for the Third Week

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U.S. oil prices eked out a quarterly gain after a government report revealed a weekly decrease in crude supplies that was contrary to expectations. The third straight fall in domestic oil stocks was accompanied by a decrease in distillate inventories. Additionally, the agency said that gasoline stockpiles increased and oil supplies at the Cushing, OK, delivery hub rose too, but these had little effect on the positive response to the Energy Information Administration ("EIA") data. On the New York Mercantile Exchange, WTI crude futures gained 93 cents, or 2.4%, to settle at $40.22 a barrel on Wednesday. The commodity moved 2.4% higher over the past three months.

Analyzing the Latest EIA Report

Below we review the EIA's Weekly Petroleum Status Report for the week ending Sep 25.

Crude Oil: The federal government’s EIA report revealed that crude inventories fell by 2 million barrels compared to expectations of a 1.9 million-barrel build. The combination of a sizeable increase in exports and a ramp up in refinery activity accounted for the surprise stockpile draw with the world's biggest oil consumer even as domestic production stayed firm. This puts total domestic stocks at 492.4 million barrels — 16.5% higher than the year-ago figure and 13% higher than the five-year average.

On a bearish note, the latest report showed that supplies at the Cushing terminal (the key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange) increased 1.8 million barrels to 56.1 million barrels.

The crude supply cover — at 37 days — was unchanged from the previous week. In the year-ago period, the supply cover was 25.3 days.

Let’s turn to the products now.

Gasoline: Gasoline supplies rose for the first time in eight weeks. The 683,000-barrel increase is attributable to higher imports. Analysts had forecast a decline of 1.3 million barrels. At 228.2 million barrels, the current stock of the most widely used petroleum product is around 1% lower than the year-earlier level but1% above the five-year average range.

Distillate: Distillate fuel supplies (including diesel and heating oil) decreased for the second week in a row. The 3.2-million-barrel fall reflected a pullback in production. Meanwhile, the market looked for a supply draw of 1.7 million barrels. Current inventories — at 172.8 million barrels — are 31.6% higher than the year-ago level and 21% higher than the five-year average.

Refinery Rates: Refinery utilization was up1% from the prior week to 75.8%.

Concerns Remain Despite Quarterly Gain

While oil prices have come a long way since the depths of minus $38 a barrel in April, lingering signs of demand weakness are still evident. As long as the coronavirus outbreak continues unabated (as is now the case in India and across Europe which is fighting the second wave), there will be pressure on the demand side of the equation. In particular, there are apprehensions about the recovery in refining throughput.

Agreed, gasoline consumption has improved from their pandemic lows but they remain weak. Even refinery utilization in the United States remains far below the usual capacity usage at this time of the year.

As it is, during the August-October period, the U.S. refining network in the Gulf Coast experiences regular drops in utilization due to the impact of hurricane shutdowns. Moreover, with the onset of the refinery maintenance season, traders expect the glut to worsen.

As 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 demand erosion caused by the efforts to stem the spread of 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 its plan to indefinitely stop production at its Gallup and Martinez refineries in response to collapsing product demand. More recently, Royal Dutch Shell (RDS.A - Free Report) has said that it will cease operations at its 110,000 barrel-a-day refinery in the Philippines. The sectoral woes have prompted the likes of Phillips 66, Marathon Petroleum and HollyFrontier (HFC - Free Report) to move toward renewable diesel.

Overall, fears are mounting that oil demand recovery from the coronavirus pandemic will be sluggish in the second half of 2020. A period of sustained low usage of the fuel would create a new headwind for the commodity.

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