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Will Rising Fuel Stockpiles Stall Oil's Upward Momentum?

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U.S. oil prices ended marginally lower yesterday, as investors looked past the Energy Information Administration’s ("EIA") third successive weekly crude stockpile draw and turned their attention to the rising gasoline and distillate supplies.

On the New York Mercantile Exchange, WTI crude futures edged down 9 cents or 0.1%, to settle at $69.96 a barrel, after closing on Tuesday at $70.05, its highest finish since October 2018.

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

Analyzing the Latest EIA Report

Crude Oil: The federal government’s EIA report revealed that crude inventories fell by 5.2 million barrels compared to expectations of a 4.1-million-barrel decline. An uptick in refinery demand coupled with higher exports accounted for the larger-than-expected stockpile draw with the world’s biggest oil consumer. This puts total domestic stocks at 474 million barrels — 11.9% less than the year-ago figure and 4% lower than the five-year average.

On a somewhat 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) edged up 165,000 barrels to 45.7 million barrels.

Meanwhile, the crude supply cover was down from 31.4 days in the previous week to 30.6 days. In the year-ago period, the supply cover was 40.9 days.

Let’s turn to the products now.

Gasoline: Gasoline supplies increased for the second week in a row. The 7-million-barrel addition is attributable to a decrease in demand. Analysts had forecast gasoline inventories to rise by 1 million barrels. At 241 million barrels, the current stock of the most widely used petroleum product is 6.8% less than the year-earlier level and hovering around the five-year average range.

Distillate: Distillate fuel supplies (including diesel and heating oil) also rose for the second time in as many weeks. The 4.4-million-barrel jump reflected a pullback in demand. Meanwhile, the market looked for a supply gain of 400,000 barrels. Current inventories — at 137.2 million barrels — are 22% below the year-ago level and 5% less than the five-year average.

Refinery Rates: Refinery utilization, at 91.3%, was up 2.6% from the prior week.

Wrapping Up

Oil prices settled slightly lower on Wednesday, following hefty builds in gasoline and distillate inventories due to a decline in consumption. In particular, the increase in U.S. product stockpiles for the second consecutive week has somewhat clouded the fuel’s optimistic demand outlook for the summer driving season. Gasoline stockpiles have risen to their highest level since February, while usage is at a three-month low. Moreover, distillate demand fell to 3.4 million barrels per day, the least since early January.

However, industry observers believe that the decrease in fuel demand is only transitory and unlikely to derail the broader energy recovery. In fact, market fundamentals have materially improved from last year’s pandemic lows, with oil supplies currently at a more than three-month low.

Of late, crude has found strong support in the high-60s, with the U.S. benchmark nudging past $70 a barrel earlier this week for the first time in more than two and a half years. Apart from successful vaccine rollouts and the calibrated production cuts by the OPEC+ cartel, the commodity’s upward momentum is being supported by easing coronavirus infections in the United States and Europe, the passage of the $1.9-trillion stimulus bill, and signs of robust demand in the world’s second-largest oil consumer, China. In particular, much of the bullish argument is simply a bet on stronger economic growth in the Western markets and the subsequent improvement in consumer spending.

The renewed confidence can be gauged from the fact that the Zacks Oil/Energy sector has gained 29.4% so far this year, outperforming the S&P 500 Index’s 13.3% appreciation. In fact, some of the major gainers of the S&P 500 this year include energy-related names like Marathon Oil (MRO - Free Report) , Devon Energy (DVN - Free Report) , Diamondback Energy (FANG - Free Report) , EOG Resources (EOG - Free Report) , Hess Corporation (HES - Free Report) , Schlumberger (SLB - Free Report) and Occidental Petroleum (OXY - Free Report) .

Marathon, carrying a Zacks Rank of #3 (Hold), is the top-performing energy stock with a gain of 100.30%, followed by Devon (90.78%), Diamondback (82.40%), EOG (72.07%), Hess (68.37%), Schlumberger (63.81%) and Occidental (63.78%).

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

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