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Oil at 4-Year High as Iran Sanctions Offset Huge Stock Build

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The U.S. Energy Department's inventory release showed that crude stockpiles recorded their largest weekly build of 2018 on waning exports and continued strength in production.

Upcoming Iran Sanctions Overshadow EIA Data

However, oil traders chose to overlook the bearish EIA data and were more concerned about the anticipated supply disruptions ahead of the U.S. sanctions on Iran’s energy sector on Nov 4. Meanwhile, major producers have refused to boost output despite pressure from President Trump amid tightening global supplies. At a meeting in Algeria recently, OPEC and its allies did not commit to any output increase to compensate for the loss of Iranian exports. As a result, the front month West Texas Intermediate (WTI) crude futures moved up 1.6% (or $1.18) to end at $76.41 per barrel yesterday – the highest settlement since Nov 21, 2014.

Analysis of the EIA Data

Crude Oil: The federal government’s EIA report revealed that crude inventories jumped by 8 million barrels for the week ending Sep 28, following an increase of 1.9 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 up some 2.8 million barrels. Sustained record high domestic production and a steep drop in exports led to the massive stockpile build with the world's biggest oil consumer.

Output in the United States stayed strong at 11.1 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. Meanwhile, crude outflows averaged 1.72 million barrels per day last week, down 917,000 barrels per day from the previous week.

Stocks at the Cushing terminal in Oklahoma – the key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange – soared 1.7 million barrels to 24.5 million barrels.

Despite last week’s hefty build, oil inventories have generally trended lower in a year and a half. The gradual fall has helped the U.S. crude market shift from year-over-year storage surplus to a deficit. At 404 million barrels, current crude supplies are 13.1% below the year-ago figure and are at the five-year average.

The crude supply cover was up from 22.8 days in the previous week to 23.6 days. In the year-ago period, the supply cover was 30.3 days.

Gasoline: Gasoline supplies were down for the second time in three weeks on stronger demand. The 459,000 barrels decline – below the polled number of 672,200 barrels fall in supply level – took gasoline stockpiles down to 235.2 million barrels. Despite last week’s draw, the current stock of the most widely used petroleum product is still about 7% above the year-earlier level as well as the five-year range.

Distillate: Distillate fuel supplies (including diesel and heating oil) were down 1.8 million barrels last week, almost in line with analyst projections. The second consecutive weekly fall could be attributed to higher export activity. At 136.1 million barrels, current supplies are essentially flat with the year-ago level and 3% lower than the five-year average.

Refinery Rates: Refinery utilization was unchanged from the prior week at 90.4%.

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) .

Want to Own an Energy Stock Now?

While all crude-focused stocks stand to gain from oil’s recovery to $75 and above, companies in the exploration and production (E&P) sector are the best placed, as they will be able to extract more value for their products.

If you are looking for a near-term E&P play, Northern Oil & Gas, Inc. (NOG - Free Report) may be a good selection. This company has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Northern Oil & Gas is a non-operator explorer and producer with primary focus on the Williston Basin in North Dakota and Montana. Around 85% of the company’s production is comprised of crude oil. In the last 60 days, six earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has risen 19.6% in the same period.

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