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Oil Drops Sharply After Unexpected Weekly Supply Increase

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The U.S. Energy Department's inventory release showed that crude stockpiles recorded an unexpected weekly build as domestic oil production reached another all-time high. On a further bearish note, the report revealed that refined product inventories, gasoline and distillate, both rose from their week earlier levels.

Following the negative data sets, the front month West Texas Intermediate (WTI) crude futures lost 1.2% (or 79 cents) to $64.73 per barrel yesterday – the lowest settlement since Apr 9.

Analysis of the EIA Data

Crude Oil: The federal government’s EIA report revealed that crude inventories rose by 2.1 million barrels for the week ending Jun 1, following a decrease of 3.6 million barrels in the previous week. The analysts surveyed by S&P Global Platts – the leading independent commodities and energy data provider – had expected crude stocks to go down some 1.3 million barrels.

Soaring imports and record high domestic production led to the shock build with the world's biggest oil consumer even as refiner demand hit a five-month high.

In particular, U.S. output rose by 31,000 barrels per day last week to 10.8 million barrels per day – the most since the EIA started maintaining weekly data in 1983. In early February, oil production broke through the 10 million barrels a day threshold for the first time in nearly 50 years and has maintained the record levels thereafter.

Despite last week’s increase, oil inventories have generally trended lower in a year and a half. In fact, stockpiles have shrunk in 41 of the last 61 weeks and are down more than 75 million barrels in the past year. The gradual fall has helped the U.S. crude market shift from year-over-year storage surplus to a deficit. At 436.6 million barrels, current crude supplies are 15% below the year-ago period and are in the bottom half of the average range during this time of the year.

Moreover, stocks at the Cushing terminal in Oklahoma – the key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange – fell 955,000 barrels to 34.6 million barrels.

The crude supply cover was down from 26 days in the previous week to 25.8 days. In the year-ago period, the supply cover was 29.7 days.

Gasoline: Gasoline supplies were up a third week in a row as demand weakened. The 4.6 million barrels gain – defying the polled number of 600,000 barrels fall in supply level – took gasoline stockpiles up to 239 million barrels. Following last week’s addition, the stock of the most widely used petroleum product inched closer to the year-earlier level and it is in the top half of the average range.

Distillate: Distillate fuel supplies (including diesel and heating oil) went up 2.2 million barrels last week, significantly ahead of analysts’ expectations for 700,000 barrels increase in supply level. The weekly rise could be attributed to lower demand. At 116.8 million barrels, current supplies are 22.7% below the year-ago level and are in the lower half of the average range for this time of the year.

Refinery Rates: Refinery utilization was up by 1.5% from the prior week to 95.4%.

About the Weekly Petroleum Status Report

The Energy Information Administration (EIA) Petroleum Status Report, containing data of the previous week ending Friday, outlines information regarding the weekly change in petroleum inventories held and produced by the U.S., both locally and abroad.

The report provides an overview of the level of reserves and their movements, thereby helping investors understand the demand/supply dynamics of petroleum products. It is an indicator of current oil prices and volatility that affect the businesses of the companies engaged in the oil and refining industry.

The data from EIA generally acts as a catalyst for crude prices and affect producers, such as ExxonMobil (XOM - Free Report) , Chevron (CVX - Free Report) and ConocoPhillips (COP - Free Report) , and refiners such as Valero Energy (VLO - Free Report) , Phillips 66 (PSX - Free Report) and Marathon Petroleum (MPC - Free Report) .

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