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Oil prices traded to some of the highest levels seen in over a year after the Energy Information Agency (EIA) reported a surprise draw to U.S. crude inventories of 5.2 million barrels, versus analyst expectations for a build of about 2.5 million barrels. The front-month contract for WTI rose almost 3 percent to about $52 per barrel immediately following Wednesday morning’s release, which was the sixth week out of seven that the EIA reported a decrease to crude stocks.
The front-month WTI contract settled up 2.6 percent Wednesday on the NYMEX at $51.60 per barrel, while the Brent front-month contract rose 1.9 percent on the ICE to $52.67 per barrel.
For the week ending Oct. 14, the EIA also reported that gasoline inventories rose by 2.5 million barrels and distillate (including diesel and heating oil) decreased by 1.2 million barrels. According to the EIA, total demand for products over the last four-week period has increased by 3.6 percent over the same time last year, but inventory levels for crude, gasoline and distillate all remain at or above the upper limit of the average seasonal range.
The U.S. refinery utilization rate fell half a percent week over week from 85.5 to 85 percent, which is to be expected given that we’re in the midst of refinery maintenance season. A significant drop in crude imports, of almost 1 million barrels per day, appears to be the primary reason for the unexpected fall in crude inventories.
Many in the market are still looking to see when U.S. oil production will dip below the 8 million barrel per day threshold, which would possibly indicate that shale and tight oil producers are shutting in wells due to the strain of low oil prices. In the EIA’s Wednesday data release, it showed that U.S. production increased slightly, and still hovers around the 8.5 million barrel per day mark.
Saudi Arabia’s energy minister Khalid al-Falih made comments at a major oil and gas conference Wednesday that he views the oil markets at the brink of a turnaround. He also mentioned that the recent unofficial agreement made in Algiers among members of the Organization of Petroleum Export Countries (OPEC) to cut back as much as 700,000 barrels per day in output signals the cartel’s willingness to reduce the global oil supply glut.
Despite the rhetoric, and assuming that production is ratcheted down by the numbers OPEC has proffered, it would not be sufficient to balance a market that is struggling with a large supply overhang and waning global demand. Other factors militating against the efficacy of an OPEC supply cut to balance the markets is that certain cartel members, including Nigeria, Libya and Iran, would be exempted from any agreed freeze or cut. In fact, many argue that the chances for OPEC production to increase by the end of this year – as previously offline capacity in those exempted countries comes back online – are just as likely.
Saudi Arabia also announced the largest ever emerging market bond offering, valued at $17.5 billion. The Kingdom relies on oil exports for almost 80 percent of its revenue, and has been battling for market share versus other major global oil producers for over two years. With a widening budget brought on by the low price of oil and faced with the task of instituting a new social compact with its population – one that doesn’t provide government support from cradle to grave – all the while prosecuting proxy wars in Yemen and Syria, the Kingdom has been burning through foreign reserves at an alarming rate.
With the announcement around the bond issuance and the heightened interest it has already garnered, the Kingdom appears to be on track to continue its strategy of growing its market share, which will only serve to keep oil prices range-bound for the foreseeable future.
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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