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Wednesday morning, oil prices rose after traders eschewed bearish data points from the Energy Information Agency (EIA) around rising inventory levels and lower gasoline demand. Instead, the market closed in on the fact that U.S. crude production decreased for the week ending Jan. 27.
With the rapid rise in the U.S. oil rig count in recent weeks, the threat of material advances in U.S. oil production has led to uncertainty around the cumulative effect of the coordinated output cuts being carried out by the Organization of the Petroleum Exporting Countries (OPEC) and other non-OPEC producers to balance global oil markets.
The front-month WTI contract settled up 2 percent Wednesday on the NYMEX at $53.88 per barrel, while the Brent front-month contract rose 2.2 percent on the ICE to $56.80 per barrel.
The rise and fall of the U.S. dollar has had an outsize impact on oil prices over the last couple of years – and often outranks fundamental factors in the market. On Wednesday afternoon, the Federal Reserve confirmed expectations for no rate rise to occur, which left the dollar relatively flat on the day. With no real change in the dollar, oil prices were mostly moved by bullish sentiment around OPEC holding up its part of the bargain in the agreed coordinated cut of 1.8 million barrels per day.
President Trump has argued for a weaker dollar – and though just rhetoric – it has had some effect on currency traders to push the greenback lower, thereby pumping up oil prices. Trump’s actual policies – yet to be implemented, but articulated to boost the U.S. economy – would have the effect of strengthening the U.S. dollar, which would present a headwind for oil prices.
The market, which is overwhelmingly net long oil, has been glomming on to bullish signals. On Wednesday, oil was boosted by positive newsflow that independent analysts had estimated for the month of January, OPEC had a very high rate of compliance – over 80 percent – in paring back production by 1.2 million barrels per day. For reference, OPEC has averaged around a 60 percent adherence level with similar cuts in times past.
For the week ending Jan. 27, the EIA reported that U.S. crude inventories rose by 6.5 million barrels, versus expectations for a build of about 3 million barrels. Gasoline inventories rose by 3.9 million barrels, versus expectations for a build of around one million barrels. Distillate stocks (including diesel and heating oil) also rose week over week by 1.6 million barrels, versus analyst estimates for a drop of about 900,000 barrels.
The rise in crude inventories could be attributed to a large increase to imports versus the previous week. For the week ending Jan. 27, the EIA reported that net U.S. crude imports rose 480,000 barrels per day to 8.3 million barrels per day. The U.S. Gulf Coast region (PADD 3) saw the largest increase to inventories, with a gain of 754,000 barrels per day versus the previous week. The U.S. East Coast (PADD 1) actually saw a decrease in imports of 809,000 barrels per day over the previous week.
According to the EIA, U.S. gasoline demand for the last four-week period is down 5.7 percent compared to the same time last year. The weekly U.S. refinery utilization stayed relatively flat at 88.2 percent.
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 firstname.lastname@example.org
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