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Vaccine Euphoria Aids Oil in the Face of Huge Supply Build

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The latest inventory data from U.S. Energy Information Administration (“EIA”) unsettled the oil markets. News that crude supplies jumped a monstrous 15.2 million barrels, coupled with big additions to fuel stocks, put pressure on the commodity. Yet, oil traders were barely alarmed, underscoring the market’s vaccine-related optimism and relief associated with the OPEC+ deal. On the New York Mercantile Exchange, WTI crude futures lost a mere 8 cents or 0.2%, to settle at $45.52 a barrel.

Below we review the EIA's Weekly Petroleum Status Report for the week ending Dec4.

Analyzing the Latest EIA Report

Crude Oil: The federal government’s EIA report revealed that crude inventories surged by 15.2 million barrels compared to expectations of a 700,000-barrel decrease. A plunge in exports and a steep jump in imports primarily accounted for the massive build with the world’s biggest oil consumer even as refinery activity trended up. This puts total domestic stocks at 503.2 million barrels — 12.3% more than the year-ago figure and 11% higher than the five-year average.

On a somewhat positive 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) decreased 1.4 million barrels to 58.2 million barrels.

Meanwhile, the crude supply cover was up from 35.1 days in the previous week to 35.6 days. In the year-ago period, the supply cover was 27.1 days.

Let’s turn to the products now.

Gasoline: Gasoline supplies increased for the fourth consecutive week. The 4.2-million-barrel build is attributable to lackluster consumption. In fact, U.S. gasoline demand fell by 373,000 barrels per day during the week under review as the resurging coronavirus outbreak forced people to stay at home. Analysts had forecast gasoline inventories to rise by 2.2 million barrels. At 237.9 million barrels, the current stock of the most widely used petroleum product is around 1.3% higher than the year-earlier level and 5% above the five-year average range.

Distillate: Distillate fuel supplies (including diesel and heating oil) increased for the second week in a row. The 5.2 million-barrel build reflected a slide in demand. Meanwhile, the market looked for a supply increase of 1.2 million barrels. Current inventories — at 151.1 million barrels — are 22.2% higher than the year-ago level and 11% higher than the five-year average.

Refinery Rates: Refinery utilization was up 1.7% from the prior week to 79.9%.

Conclusion

Oil prices moved lower on Wednesday after U.S. crude stocks soared last week by the most in almost eight months amid a hefty increase in gasoline and distillate inventories. However, the bearish data sets were overshadowed by continued vaccine-related developments that offer hope for an earlier-than-expected pickup in oil demand.

Last week, the U.K. government approved the Pfizer (PFE - Free Report) -BioNTech coronavirus vaccine — the first country in the world to do so. The move by the British government, which is likely to be followed by other nations including the United States, is seen as big step against the deadly pandemic that has crushed the commodity’s demand and caused a bloodbath for the energy-related stocks. A treatment is expected to revive economic and transport activity, leading to stronger crude demand.

Even so, the markets remain tense as oil and product inventories continue to be higher than their five-year averages for this time of the year. As it is, with the reimposition of government measures to fight the spread of the pandemic’s second wave, even the Thanksgiving week saw significantly lower traffic thereby pushing down fuel demand even further.

But overall, the crude sentiment has flipped from bearish to bullish on strengthening tailwinds. Oil bulls are also supported by the OPEC + agreement to increase output by 500,000 barrels-a-day from January instead of the prescheduled 2 million barrels per day.

As a matter of fact, oil prices recently rose to their highest since early March on the back of vaccine-related optimism. Amid gains in crude prices, shares of oil-related companies have rallied in the past one month. As a matter of fact, the top five gainers of the S&P 500 during this period were all energy firms — Occidental Petroleum (OXY - Free Report) , Apache (APA - Free Report) , Diamondback Energy (FANG - Free Report) , Marathon Oil (MRO - Free Report) and Devon Energy (DVN - Free Report) . Meanwhile, the only energy representative in the 30-stock Dow Jones industrial average, Chevron (CVX - Free Report) — carrying a Zacks Rank of #4 (Sell) — has also risen handsomely.

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