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Oil markets were anticipating fairly robust inventory drawdowns after the American Petroleum Institute (API) released after the market close on Tuesday its estimates for the week ending Sept. 16. Estimates showed U.S. crude stocks had fallen by 7.5 million barrels and gasoline stocks decreased by 2.5 million barrels. Wednesday morning, the Energy Information Agency (EIA) released its Weekly Petroleum Status Report, which also showed decreases to both crude and gasoline inventories of 6.2 million barrels and 3.2 million barrels, respectively.
Following the EIA’s data release, oil was up about 2 percent in morning trading as analysts had been expecting a smaller drawdown of crude inventories, of about 3.4 million barrels.
Gasoline inventory drawdowns reflected the effects of the 2-week shutdown of the Colonial Pipeline, which supplies approximately 40 percent of gasoline refined in the U.S. Gulf Coast (PADD 3) to the U.S. East Coast (PADD 1). While analysts had anticipated a net U.S. drawdown in gasoline stocks of about 567,000 barrels, the overall number was much higher (-3.2 million barrels), with PADD 1 showing a drawdown of 8.5 million barrels and PADD 3, an increase of 4.8 million barrels.
The front-month WTI contract settled up 2.9 percent Wednesday on the NYMEX at $45.34 per barrel while the Brent front-month contract rose 2.1 percent on the ICE to $46.83 per barrel. The WTI contract was buoyed by the fall in the U.S. dollar following a statement released Wednesday afternoon from the Federal Open Market Committee (FOMC), which signaled that a rate rise - if one were to occur in 2016 - would happen in December.
The EIA also reported that distillate stocks (including diesel and heating oil) rose by 2.2 million barrels, versus expectations for a build of 250,000 barrels. U.S. oil production also rose for the week – to 8.512 million barrels per day, and marked the third straight week where U.S. onshore crude output increased, a marker that is closely watched along with the U.S. oil rig count, which has risen 11 times out of the past 12 weeks.
Although the fact that U.S. onshore production is a bearish signal for oil prices, the biggest supply-side factor currently weighing down global crude prices is that the Organization of the Petroleum Exporting Countries (OPEC) production continues to grow despite a glut that has persisted for almost two years.
The markets are giving very little credence to the possibility of a coordinated freeze to result from informal talks between OPEC members and other large producers at the upcoming Algiers conference. Despite rhetoric from Venezuela, and other OPEC members that a freeze or agreement on a possible output ceiling might be arranged, the fact remains that major producers, namely Saudi Arabia and Russia, are on pace to hit record production numbers.
In a move that will most likely boost its export capacity for Arab light and Arab Heavy crude in the near-term, Saudi Aramco announced Monday that it would be delaying maintenance until the end of the year at its 400,000 barrel per day Yanbu refinery and at its 325,000 barrel per day Ras Tanura refinery.
Additionally, Saudi Aramco may be planning to reclaim eroded market share for its crude in the United States. Speculation arose Tuesday that Aramco might be close to bidding on the ~264,000 barrel per day LyondellBassell refinery, located in Houston. In an effort to grow market share and to develop a stable customer base, Aramco has recently purchased numerous refineries in Asia. In the United States, however, Saudi Arabia has seen its market share diminish over the past two years, with less of its crude making its way to the Gulf Coast refining complex (where about 45 percent of the U.S. refining capacity is located). Instead, Canadian, Mexican, Venezuelan and Russian crudes have displaced Saudi Arabian oil imports. The possible move to make a refinery acquisition would enable the Kingdom to claw back some of its lost market share in the United States.
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 firstname.lastname@example.org
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