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Why Oil Prices Keep Falling and are Likely to Remain Low

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Oil inventories showed another record weekly build stoking investor worries of a supply glut. In total, U.S. commercial stockpiles rose by almost 50 million barrels since the week ending Mar 20. Further, domestic fuel demand dropped by a whopping 32% over the past month as the outbreak of coronavirus led to widespread lockdown with motorists off road and planes grounded. Meanwhile, refinery utilization in the United States is at its lowest level since 2008, while the latest storage surge has rendered Cushing oil storage tanks around 70% full.

The bearish data points send U.S. oil prices below $20 a barrel for the second consecutive session on Thursday. May WTI settled at $19.87 a barrel yesterday and day before — levels not seen in 18 years — as investors remain concerned that the OPEC+ group’s historic production cut deal won’t be enough for the market to rebalance.

Independent energy research and business intelligence company Rystad Energy estimates a massive supply surplus of 27.4 million barrels per day in April, while The International Energy Agency (IEA) projects the imbalance for the month at 29 million barrels a day.

This implies that oil prices are unlikely to trade much higher from current levels. It's been a catastrophic year so far for crude oil, with the American benchmark WTI suffering a dramatic 65% collapse. Even the likes of ExxonMobil (XOM - Free Report) , Chevron (CVX - Free Report) , Royal Dutch Shell (RDS.A - Free Report) and BP plc (BP - Free Report) are struggling to contend with these low commodity prices with their dividend paying business models under severe pressure. But some E&P operators like Occidental (OXY - Free Report) — carrying a Zacks Rank #3 (Hold) — had to slash their dividend payout

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

The latest figures from the EIA, which point to an oversupplied oil market, have added to the turmoil.

Analyzing the Latest EIA Report

The U.S. Energy Department's latest inventory release revealed the twelfth straight weekly increase in stockpiles, while gasoline inventories rose sharply too.

Below we review the EIA's Weekly Petroleum Status Report for the week ending Apr 10.

Crude Oil: The federal government’s EIA report revealed that crude inventories surged by 19.2 million barrels, the largest weekly build ever, compared to the 10.1 million barrels increase that energy analysts had expected. A slump in refinery runs, tied to evaporating demand associated with the pandemic, primarily drove the record stockpile build with the world's biggest oil consumer. This puts total domestic stocks at 503.6 million barrels – 10.6% above the year-ago figure and 6% over the five-year average. Per the official U.S. data, oil inventories topped 500 million barrels for the first time in almost three years.

The latest report also showed that supplies at the Cushing terminal in Oklahoma (the key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange) was up 5.7 million barrels to 55 million barrels.

The crude supply cover was up from 32.2 days in the previous week to 35.3 days. In the year-ago period, the supply cover was 28.5 days.

Let’s turn to products now.

Gasoline: Gasoline supplies tallied a big increase for the third week in a row. The fuel’s 4.9 million barrels jump is attributable to the drying up of demand from the coronavirus-induced economic shutdown. Analysts had forecast 7.1 million barrels build. At a record 262.2 million barrels, the current stock of the most widely used petroleum product is 15% higher than the year-earlier level and is 12% above the five-year average range. Disruption due to the pandemic’s effect has depressed the products’ consumption significantly, which edged up by 16,000 barrels per day last week but remained within touching distance of the previous week’s record low of 5.1 million barrels per day.

With the EIA numbers starting to reflect the demand destruction caused by the contagion, market watchers believe that demand is set to shrink further (in April and May) and the worst is still to come for the oil markets. Independent analysts say that motor fuel consumption is set to take a severe hit as coronavirus forces more people to work remotely and observe social distancing.

Distillate: Distillate fuel supplies (including diesel and heating oil) jumped by 6.3 million barrels in the face of plummeting demand. The 6.3 million barrels increase could be attributed to plunging demand. Meanwhile, the market had been looking for a supply build of 1.8 million barrels. Current supplies — at 129 million barrels — are 1% higher than the year-ago level but remain 7% below the five-year average.

Refinery Rates: Refinery utilization was down 6.5% from the prior week to 69.1%, the lowest since September 2008. Downstream operators including Phillips 66, Marathon Petroleum (MPC - Free Report) , HollyFrontier (HFC - Free Report) have drastically reduced processing capacity to cope with the demand erosion caused by efforts to stem the spread of the coronavirus. As a matter of fact, U.S. oil input to refineries fell 970,000 barrels last week to 12.7 million barrels.  

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