Oil Prices Fall off Larger than Expected Rise in Crude Inventories

Oil prices fell immediately following Wednesday’s release of the Energy Information Agency’s (EIA) Weekly Petroleum Status Report, which showed a large build to both crude and petroleum product inventories. Oil markets were boosted Tuesday on talk that Iran was potentially willing to join discussions around coordinated OPEC action to help stabilize oil prices, but the EIA data release brought traders back to the reality that global crude and petroleum product supplies remain at record levels.

The front-month West Texas Intermediate (WTI) contract settled down 2.8 percent on the NYMEX at $46.77 per barrel, while the Brent front-month contract fell 1.8 percent on the ICE to $49.05 per barrel.

The EIA reported that for the week ending Aug. 19, U.S. stocks for crude and all products (excluding the strategic reserve) was at 1.4 billion barrels, representing a historic high for this time of year, and 9.1 percent higher than during the same period in 2015. U.S. crude inventories rose 2.5 million barrels, versus analyst expectations for a slight increase of about 200,000 barrels. Gasoline inventories were unchanged from the previous week, but at 232.7 million barrels are 8.5 percent higher than during the same time last year. Distillate, which includes heating oil and diesel, showed an increase of 100,000 barrels over the previous week.

After the American Petroleum Institute (API) released Tuesday evening its estimates for the week ending Aug. 19, which showed a rise in crude inventories of 4.5 million barrels, the market was bracing itself for more bearish data in the lead-up to the EIA release Wednesday morning.

There was some expectation for reduced crude demand due to the fact that several refineries in Louisiana were slowed down by flooding in the area, including ExxonMobil’s 502,000 bpd-Baton Rouge, Louisiana refinery. The EIA data showed that the Gulf Coast (PADD 3) region’s refineries, which accounts for over 45 percent of total U.S. capacity, operated at a reduced rate of 92.3 percent. This compares with a utilization rate of 94.7 percent during the prior week, and about 4 percentage points lower than during the same period last year.

The EIA data also showed that U.S. oil production fell by 49,000 barrels per day to 8.4 million barrels per day, which is almost 800,000 barrels per day less than the same time last year when the U.S. benchmark was trading at around $43 per barrel (the average price for August 2015). With oil prices up more than 10 percent for the month, trading in a range between $40 per barrel and about $50 per barrel, many market watchers are speculating that between $45 per barrel and $50 per barrel is the price point where many U.S. producers are encouraged to turn the spigots back on. 

Reports on Tuesday that Iran’s oil ministry was “open” to attending an informal September meeting among OPEC members and other oil major producers in Algeria to discuss a possible output freeze might have induced some profit-taking among traders. The gesture to attend the meeting is a nominal step forward in greater cartel cohesion, which has eroded since the fateful Nov. 27, 2014-meeting where OPEC (led by Saudi Arabia), decided to let market forces set the price.

That decision has led to an intense competition among members for market share. That said, Iran is currently producing at about 3.6 million barrels per day, and had previously stated that it would not be a party to any freeze until it had reached pre-sanction production levels of between 4.2 million barrels per day and 4.6 million barrels per day.

Given this imperative to ramp up to pre-sanction levels, it is unlikely Iran would agree to any freeze, which, would have a negligible impact – if any – to supporting prices, given the world’s largest oil producers, such as Saudi Arabia and Russia are pumping crude at record levels. The fact remains that the global crude market is out of equilibrium by as much as 500,000 barrels per day, by some accounts.

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 delia.morris@stratfor.com

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Brent Crude Oil : $54.46/BBL 0.96%
Light Crude Oil : $51.68/BBL 1.21%
Natural Gas : $3.44/MMBtu 1.99%
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