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Oil Market at a Crossroads: Will It Break Out or Break Down?

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U.S. oil prices settled higher on Wednesday after a weekly report from the Energy Information Administration ("EIA") revealed that domestic crude stockpiles fell unexpectedly from their record levels. On the New York Mercantile Exchange, August WTI crude gained 55 cents, or 1.4%, to end at $39.82 a barrel, near the highest settlement since the beginning of March.

Analyzing the Latest EIA Report

Below we review the EIA's Weekly Petroleum Status Report for the week ending Jun 26.

Crude Oil: The federal government’s EIA report revealed that crude inventories fell by 7.2 million barrels, compared to expectations for a 2.7 million barrels decrease. A drop in imports and increased refining activity accounted for the big stockpile decrease with the world's biggest oil consumer. While retreating from last week’s all time highs, current domestic stocks - at 533.5 million barrels is still 13.9% above the year-ago figure and 15% over the five-year average. 

Oil prices also drew support from another stockpile draw at the Cushing terminal in Oklahoma. The key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange saw inventories edge down 263,000 barrels to 45.6 million barrels.

The crude supply cover was down from 39.9 days in the previous week to 38.8 days. In the year-ago period, the supply cover was 27.2 days.

Let’s turn to products now.

Gasoline: Gasoline supplies tallied an increase for the first time in three weeks. The fuel’s 1.2 million barrels build is attributable to rising production and imports, coupled with weaker demand. Analysts had forecast 2.7 million barrels fall. At 256.5 million barrels, the current stock of the most widely used petroleum product is 11.2% higher than the year-earlier level and is 10% above the five-year average range.

Distillate: Distillate fuel supplies (including diesel and heating oil) fell for just the second time in 13 weeks. The 593,000 barrels decrease reflects improving demand, which has been badly hit by the coronavirus crisis. Meanwhile, the market had been looking for a supply build of 900.000 barrels. Current supplies — at 174.1 million barrels — are 37.3% over the year-ago level and 28% above the five-year average.

Refinery Rates: Refinery utilization was up 0.9% from the prior week to 75.5%. 

Conclusion

The drop in crude inventories came as refinery runs rose by 193,000 barrels per day and shipments from Saudi Arabia fell with the kingdom reining its production as part of the OPEC+ cuts. On a further positive note, oil at the storage hub in Cushing continued to fall.

The report was also supportive in terms of U.S. producers scaling back operations. Weekly figures show output has dropped to 11 million barrels per day  since reaching 13.1 million barrels in the second week of March.

In particular, volumes from United States’ number one basin – Permian - is set to fall by 7,000 bbl/d month over month to 4.3 MMbbl/d in July – the third month of decline, as the likes of Diamondback Energy (FANG - Free Report) , Cimarex Energy, Concho Resources (CXO - Free Report) , Pioneer Natural Resources (PXD - Free Report) and others invest a lot less money into the unconventional play in 2020.

The pockets of bullish data in the report notwithstanding, investors still remain worried of the supply glut. In total, U.S. commercial stockpiles are up by around 18% since March, while domestic fuel demand, though improving, remains weak. As it is, a surprise build in gasoline inventories in the latest report kept traders worried.

Again, despite another rise in refinery runs, utilization in the United States remain far below the usual capacity usage at this time of the year. Downstream operators including Valero Energy (VLO - Free Report) , Marathon Petroleum (MPC - Free Report) , HollyFrontier (HFC - Free Report) - all carrying a Zacks Rank #3 (Hold) - have drastically reduced processing capacity to cope with the demand erosion caused by efforts to stem the spread of the coronavirus. The demand has still not picked up to a level where the operators think of restarting/increasing their refinery work.

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

Crude is also being pressured by the second wave of coronavirus infections. As several U.S. states experience a spike in new coronavirus infections and hospitalization, there are apprehensions regarding another lockdown with many businesses forced to close again just after reopening. Moreover, this would create doubts around the trajectory of oil’s demand recovery.

Crude’s rise from the bottom could also encourage the shale patch to ramp up or resume drilling activities. In fact, the sharp gains in the price have already prompted the likes of EOG Resources (EOG - Free Report) and Parsley Energy to plan for potential revival of production. 

Therefore, it appears that the oil market is at a crossroads where any direction is possible.

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