WTI Rises 6.3% on Larger than Expected Declines to Product Inventories

After hitting multi-week lows Tuesday, oil prices rallied Wednesday on positive newsflow that brought some confidence to traders despite the ever present global oil glut that has been plaguing the markets for months. The front-month Brent contract settled on the ICE at $49.05/bbl (up 4.8 percent); WTI was up 6.3 percent on the day, settling at $45.94 on the NYMEX. Following a Wednesday afternoon announcement from the Fed that hinted at a possible rate increase by year-end, the dollar strengthened versus other currencies, and weighed down oil futures prices.

In after-market trading Tuesday, oil prices fell following the release of the American Petroleum Institute’s (API) crude oil stock report that estimated a 4.1 million barrel build to crude inventories (for the week ending Oct. 23), which fed into bearish sentiment. On Wednesday, however, the markets changed course, and found reason to build positive momentum based on several key data points. In the EIA’s Weekly Petroleum Status report (for the week ending Oct/ 23), crude inventories showed a lower than expected increase of 3.4 million barrels. The market was further encouraged by greater than expected decreases to gasoline stocks (down 1.1 million barrels versus analyst estimates of 900,000 barrels) and distillate inventories (down 3 million barrels versus analyst estimates of around a 2 million barrel decline).

According to the EIA report, the U.S. refinery utilization rate increased week/week from 86.4 percent to 87.6 percent, an indicator that refineries are gradually emerging from their seasonal maintenance period. Although still at 80-year highs, crude storage levels in Cushing, OK, fell 800,000 barrels to 53.3 million barrels. The EIA data showed that Midwest refineries (PADD 2) showed a considerable uptick in its refinery utilization rate week/week (from 73.5 percent to 79.6 percent), which could partially explain the drawdown in Cushing crude stocks, located in PADD 2. Another positive data point for oil - the EIA reporting that demand for light products (gasoline and jet fuel) were up for the same 4-week period year/year and distillate consumption increased by 10 percent. The report did show that U.S. oil production increased slightly week/week and remains at about 9.1 million barrels per day (bpd). It appears that markets are less focused than before on seeing a significant slowdown in U.S. production growth in order for prices to gain support.

Oil prices also received a boost Wednesday after Petróleos Mexicanos (Pemex) announced that it had been granted a one-year license to import up to 75,000 bpd of U.S. light crude, starting this month. The market viewed this as further evidence that the U.S. government was moving in the direction of loosening the 40-year old crude export ban, which many analysts argue depresses oil prices.


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