After U.S. crude settled below the $40 per barrel level Tuesday for the first time since April 2016, oil prices gained lost ground Wednesday off the back of better than expected gasoline inventory data from the Energy Information Agency (EIA). Stronger than expected U.S. employment data released Wednesday morning from Automatic Data Processing (ADP) lent support to the belief that the Federal Reserve would raise interest rates as early as September, which boosted the dollar, and otherwise pared some of oil’s advances.
The front-month U.S. West Texas Intermediate (WTI) contract settled up 3.3 percent on the NYMEX at $40.83 per barrel, while the Brent front-month contract rose 3.1 percent on the ICE to $43.10 per barrel.
Immediately after the release of the EIA’s closely watched Weekly Petroleum Status Report, oil prices rose more than 2 percent off data that showed a much larger than anticipated draw in U.S. gasoline inventories. For the week ending July 29, the EIA reported a decrease of 3.3 million barrels in gasoline stocks, versus expectations for a decline of 0.3 million barrels. Crude inventories increased by 1.4 million barrels, versus expectations for a draw of 0.9 million barrels, and distillate stocks rose 1.2 million barrels, versus expectations of a decrease of 0.1 million barrels.
Demand for products, which includes gasoline, diesel and jet fuel, was up about 0.6 percent for the last four-week period versus the same period last year. Although gasoline inventories showed an unexpected drop, and demand is up 2.2 percent year/year for the week ending July 29, gasoline inventories are at very high levels, globally - with some estimates at around 500 million barrels. In the U.S., gasoline inventories for the week ending July 29 stood at 238.2 million barrels, which is 10 percent higher than during the same time in 2015.
Crude inventories grew week over week despite the U.S. refinery rate increasing from 92.4 percent to 93.3 percent, which could be partially explained by an uptick in weekly crude imports of about 300,000 bpd.
Although prevailing market sentiment is that the oil markets are oversold, which has driven the price downward throughout July and into August, there is evidence that the sell-off from June’s highs is not finished. Recent reports from the Commodities Futures Trading Commission (CFTC) showing the net long position in oil futures points to the fact that some speculators have yet to liquidate their positions, which could mean we have yet to reach a bottom.
Global oil market fundamentals remain challenged – with an oversupply of crude estimated at around one million b/d, and a growing petroleum product inventory. With the summer driving season in the U.S. soon coming to a close, and weak economic data from China, the world’s second largest consumer of crude, it appears that global crude supply should outstrip demand over the near to medium term.
In another sign of an intensified battle for market share, Saudi Arabia announced Sunday that it was discounting its Arab Light crude sold into Asian markets by $1.60 per barrel - its largest price concession in 10 months. Saudi Arabia and other major oil exporters are feeling the pressure from the resurgence of Iranian crude coming back to world markets since the lifting of sanctions in January 2016. According to officials from Iran's oil ministry, the country is on pace to reach its goal to produce 4 million barrels per day (bpd) by year-end. Asia accounts for the lion’s share of Iranian crude sales.
Additional crude supply from Libya could soon enter the market after a deal was announced July 28 to reopen two of the country's largest ports for oil exports. The ports of Es Sider and Ras Lanuf, which had been under force majeure since 2014, could potentially allow up to 600,000 bpd of export capacity. However, recent attacks to the ports by Islamic State might have reduced combined capacity to just 100,000 bpd, according to some estimates.
The Nigerian government announced Monday that it had agreed to resume payments to oil militants in the Niger Delta. Over the past several months, attacks on oil operations by the militant group, the Niger Delta Avengers, had drastically affected Nigeria's crude output. The threat of future disruptions to production appear to be reduced with the resumption of payments.
Delia Morris has worked in the international upstream oil & gas industry for over 12 years, and is currently Director, Global Energy Sector at Stratfor, a geopolitical intelligence firm that provides strategic analysis and forecasting services. Please contact Delia at email@example.com
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