Crude Falls to Fresh Lows

Oil prices continued to plunge in the new year following the release of the Energy Information Agency’s (EIA) Weekly Petroleum Status Report, which showed a surprise decrease in crude inventories, but exceptionally high builds in both gasoline and distillate stocks (which includes diesel and heating oil). Off the news flow, Brent on the ICE and WTI on the NYMEX each fell in intraday trading about 5 percent to $34.63/bbl and $34.36/bbl, respectively.

On the day, the front-month Brent contract on the ICE settled down almost 6 percent to $34.23/bbl; and, WTI’s front-month contract on the NYMEX settled at $33.97/bbl (-5.6%).

Although crude inventories showed a surprise decrease of 5.1 million barrels for the week ending Jan. 1 (versus expectations for an increase of 300,000 barrels), traders gravitated toward bearish data points, beyond the headline crude numbers. The large drop in crude inventories could also be reflective of the end-of-year practice among refiners to drawdown stockpiles to limit tax burdens, and not a true indicator of increased weekly demand. The EIA data showed a weekly increase in U.S. crude production of 17,000 barrels per day (bpd), further eroding the widely-held thesis that U.S. output will eventually fall to levels that will contribute to eventually balancing the market.

According to the EIA, gasoline inventories rose 10.6 million barrels (versus analyst estimates of an increase of 2 million barrels), while distillate stocks climbed 6.3 million barrels (versus analyst estimates of a build of 2 million barrels). Demand for refined products fell 2.2 million barrels week/week, with the four-week average down 2.5 percent versus the same period last year. Gasoline demand dropped significantly, down 3.6 percent versus the same time in the previous year.

Despite overall U.S. crude inventories falling week/week, storage levels at Cushing, OK (the delivery point for the WTI contract) rose 900,000 barrels to 63.9 million barrels, representing a new record high. Across the country, the refinery utilization rate stayed relatively flat week/week at 92.5 percent, but dropped from 96.4 to 92.7 percent in the Midwest region (PADD 2) for the week ending Jan. 1. Severe floods in the Midwest during the previous week forced several companies to shutdown oil pipelines in and out of Cushing (located in PADD 2), which can help explain the large build in stocks there and lower utilization rates at Midwest refineries.

With the global oil supply overhang persisting into 2016, the market is most concerned with weakening demand, especially from emerging markets. Poor economic data from China, the world’s second largest oil consumer, sent prices tumbling Monday. Adding to the mix of negative signals for oil prices is the escalation of tension between Saudi Arabia and Iran, which dims any hope that OPEC’s two most influential members will coordinate efforts to reduce production in order to boost prices. Moreover, the anticipation of the repeal of Iranian sanctions as early as February could bring onto world crude markets an additional 500,000 to 1 million bpd in the first few months, according to some estimates.


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