Earlier in the week, oil prices hit lows not seen since February 2009 in the fallout from the Dec. 4 OPEC meeting, where the cartel decided to maintain current record production levels of 31.5 million barrels per day despite a worldwide glut of crude oil. Since the meeting, Brent has fallen through the psychologically important $40/bbl level in intraday trading and WTI has struggled to break through the $40/bbl level – having settled at $37.65/bbl Monday and $37.51/bbl Tuesday.
The front-month contract for WTI settled on the NYMEX at $37.16/bbl Wednesday and Brent’s front-month contract settled on the ICE at $40.11/bbl – continuing the downward trend in prices that gained momentum following the outcome of Friday’s OPEC meeting, which leaves the oil markets scrounging for near-term data points that will support prices.
The headline numbers from Wednesday’s Energy Information Agency (EIA) Weekly Petroleum Status Report, which showed a surprise decrease to U.S. crude inventories of 3.6 million barrels (versus expectations for an increase of about 500,000 barrels) for the week ending Dec. 4, contributed to a brief and immediate spike in Brent and WTI prices. The news, which marked the first draw in crude inventories in 11 weeks, had the January 2016 WTI contract jumping 4 percent off yesterday’s settlement price, but those gains were soon pared back when traders homed in on the larger than expected build in distillate inventories.
Distillate stocks, which includes diesel and heating oil, showed a larger than expected build of 5 million barrels, according to the EIA – versus analyst estimates for an increase of 1.3 million barrels. Weekly demand for distillates was down by almost 400,000 barrels and 1.2 percent lower when comparing the 4-week average against the same time last year. Lower distillate demand is most likely due to unseasonably warm temperatures across the United States, which results in lower heating fuel consumption. The greater than expected build in distillates exerted downward pressure on oil prices as it demonstrated to traders that despite a drawdown in crude inventories, demand for refined products is not robust enough to clear the global oversupply of oil. Gasoline inventories also showed an increase in inventories – 800,000 barrels (lower than the anticipated build of 1.4 million barrels, but still at the upper end of the average historical range).
There was also some speculation in the market that the EIA numbers did not include crude imports headed toward Gulf Coast refineries. With high tanker traffic in the Houston Ship Channel and elsewhere off the Gulf Coast, it is possible that a substantial supply of crude did not make it to onshore storage during the week ending Dec. 4, where it would have been included in the EIA data. The Gulf Coast region (PADD 3) saw the largest draw to crude stocks, a decrease of about 7 million barrels, but was the region with the largest build in distillate stocks (2.8 million barrels). As it stands, U.S. oil storage levels remain at 80-year highs and inventory levels at Cushing, OK (the delivery point for the WTI contract) showed a build of 400,000 for the week ending Dec. 4.
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