Crude Falls to Multi-year Lows on Surprise Increase in US Crude Inventories

After gaining some strength Tuesday off of short-covering and technical support (Brent settled on the ICE up 1 percent and WTI on the NYMEX rose 3 percent), prices moved sharply downward Wednesday with the release of the Energy Information Agency (EIA)’s Weekly Petroleum Status report, which showed a large and unexpected build in U.S. crude inventories. The Federal Reserve’s Wednesday announcement intending to increase the federal funds rate a quarter of a percentage point between .25 percent to .50 percent sent oil tumbling further as it boosted the dollar.

The front-month contract for WTI fell almost 5 percent on the NYMEX to settle at $35.52/bbl – a low not seen since February 2009. On the ICE, Brent traded down 3.3 percent to settle at $37.19/bbl, marking a seven-year low.

The headline numbers from the EIA showed record highs for crude and refined product inventories and led to oil’s initial slide in Wednesday’s trading. The EIA reported that crude stocks rose 4.8 million barrels for the week ending Dec. 11 (versus some analyst expectations of a draw of up to 2.5 million barrels). Inventories for gasoline and distillate (including diesel and heating oil) also rose, up 1.7 million barrels and 2.6 million barrels, respectively. Immediately following the release of the EIA report, WTI fell on the NYMEX to $35.81/bbl (-4.1 percent) and Brent on the ICE fell 3.3 percent to $37.25/bbl. Beyond the headline numbers, other bearish data points included a build in crude stocks of 700,000 barrels at Cushing, OK (the delivery point for the WTI contract). Also, U.S oil production rose slightly (up 12,000 barrels per day week/week), playing into supply concerns that the highly anticipated slowdown in U.S. onshore production is not necessarily a given.

At the same time, the oil markets were assimilating the news that leaders from both parties in the U.S. Congress had agreed to lift a 40-year ban on U.S. crude exports. The bipartisan-supported bill is likely to get passed and eventually signed into law by President Obama. For U.S. producers of oil from shale formations, the removal of the ban will open up export markets for its crude where there are refineries that are better equipped to efficiently handle light, sweet crude. The U.S. refining complex, which has 50 percent of its capacity located in the Gulf Coast region, or PADD 3, is largely configured to handle heavy sour crudes – most shale formations produce light, sweet crude. The shale/tight oil boom which started in earnest in 2010 has doubled the crude output of the United States to about 9.2 million barrels per day in the space of five years. Much of the crude produced from shale formations is a light, sweet quality and has struggled to find a "home" in the U.S. refining system, which has contributed to the glut of crude supplies at Cushing, OK and elsewhere. Long-term, with the export ban lifted, U.S. oil producers of lighter barrels will be encouraged to ramp up production which could increase crude-on-crude competition in the world oil markets and potentially lead to structurally lower oil prices, depending on the response from OPEC.


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