Oil Falls on Growing Glut Fears, Stronger Dollar



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Oil prices rose then quickly fell following the release of the Energy Information Agency’s (EIA) Weekly Petroleum Status Report, which reported a larger than expected decrease to U.S. crude inventories for the week ending Dec. 9. The EIA reported a drawdown in oil stocks of 2.6 million barrels, versus analyst expectations for a smaller decrease of about 1.6 million barrels.

The market was looking to confirm bearish data from the American Petroleum Institute (API) that was reported after the market close Tuesday. The API reported U.S. crude inventories rose 4.7 million barrels for the week ending Dec. 9. The larger than expected drawdown reported by the EIA first buoyed prices, but once traders looked past the headline numbers, which showed that 2.3 million barrels of the 2.6 million barrel-decrease was in PADD 5 (West Coast), prices fell.

Largely due to particular environmental requirements governing the refining sector in California, PADD 5 is thought of as a “closed system” and has its own dynamics that are not indicative of the overall integrated U.S. downstream market.

Crude inventory levels at Cushing, OK, the delivery point for the WTI contract, rose again this week, by 1.2 million barrels. In addition, the EIA reported that net U.S. oil production increased to about 8.8 million barrels per day – with production from the Lower 48 increasing week over week by 101,000 barrels per day.     

The front-month U.S. West Texas Intermediate (WTI) contract fell 3.7 percent Wednesday on the NYMEX to $51.04 per barrel, while the Brent front-month contract fell 3.3 percent on the ICE to $53.90 per barrel. Prices were affected negatively by the Wednesday afternoon announcement from the Federal Reserve that it was raising the federal funds rate by .25 percent, and that three additional rates rises were anticipated over the course of 2017.

In the minds of many traders, concerns linger around the efficacy and execution of the recently announced coordinated cut of 1.8 million barrels per day by the Organization of the Petroleum Exporting Countries (OPEC) and other large producers. OPEC, led by Saudi Arabia, has agreed to cut production of 1.2 million barrels per day for a six-month period, beginning in January 2017. Non-OPEC producers, led by Russia, have agreed to a cut of 558,000 barrels per day.

The International Energy Agency’s (IEA) Monthly Oil Report, released Tuesday, showed OPEC’s production estimated at 34.2 million barrels per day in November – 150,000 barrels per day higher than October. OPEC’s official accounting of its own production for the month of November was 33.87 million barrels per day.

With the cartel aiming to cap production at a notional level of 32.5 million barrels per day via the coordinated cut, it appears that more of the burden of balancing global oil markets will fall on the non-OPEC producers. Russia, which is expected to cut up to 300,000 barrels per day, or half of the proposed non-OPEC portion of cuts, holds an even less than illustrious record in adhering to coordinated cuts than OPEC itself. On Wednesday, Saudi Arabian Energy Minister Khalid al-Falih tried to tamp down expectations for a quick fix to the supply overhang facing the markets. He was reported as saying that the cuts would “take several months” to see any impact in the fundamentals.

Delia Morris has worked in the international upstream oil & gas industry for over 13 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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