Before the Energy Information Agency’s (EIA) released its closely watched Weekly Petroleum Status Report Feb. 3, oil was trading higher off of comments made by Russian Foreign Minister Sergei Lavrov that hinted at the possibility of Russia and OPEC agreeing to a coordinated crude output cut.
Oil markets had gained in four straight sessions the week prior off similar speculation, although it is doubtful any such curtailment in production is plausible given geopolitical and technical factors, as well as a poor track record for similar actions in the past.
Oil prices were also lifted by relatively positive economic data from China, the world’s second largest consumer of crude. It was reported Wednesday that the Caixin China services purchasing managers’ index rose to 52.4 in January versus 50.2 in December 2015, which was the highest reading for the non-factory sector in 6 months and indicates a monthly expansion.
As soon as the EIA reported its weekly crude and product inventory numbers, which broke a 34-year record for the highest level of weekly crude inventories (502.7 million barrels), the U.S. benchmark (WTI) front-month contract slipped about 3 percent to $29.80/bbl on the NYMEX. The EIA reported a substantially larger than expected build in crude inventories of 7.8 million barrels, as well as a rise in gasoline stocks of 5.9 million barrels. Despite 12% lower weekly demand for distillates (which includes diesel and heating oil), distillate inventories decreased for the week ending January 29th by 0.8 million barrels (but remain at the upper end of the average range).
As refiners enter a seasonal maintenance period, it is not surprising to see that the overall U.S. refining utilization dropped week/week from 87.4 percent to 86.6 percent. It is interesting to note, however, that the Midwest Region (PADD 2) had an increase in its refining utilization rate from 97.2 percent to 97.4 percent, week over week. At the same time, Cushing, OK crude inventories (located in PADD 2 and the delivery point for the WTI contract) rose by 800,000 barrels. Imports into PADD 2 rose week/week and were 93,000 barrels higher than the same period last year, which can explain the rise in the Midwest refining rate (indicating increased crude demand), yet the increase to stocks at Cushing. The EIA also reported that U.S. crude production remained flat week/week at 9.2 million b/d.
Despite the extremely bearish fundamental picture borne out by the EIA data, oil made large gains on the day based mostly on the weaker dollar. The dollar index on the ICE fell 1.6 percent on market sentiment that the Fed would possibly delay or hold steady any near-term rate increases. The fall of the dollar followed the day's announcement from the Institute for Supply Management that non-manufacturing activity in the U.S. (representing 90 percent of the country’s economic activity) fell from 55.8 in December 2016 to 53.5 in January 2016.
On the NYMEX, the front-month WTI contract settled up 8 percent at $32.28/bbl, while the Brent front-month contract rose by about 7 percent on the ICE to $35.04/bbl.
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