Oil Prices Rise on Slightly Positive EIA Data

Wednesday morning, oil rose in intraday trading off some relatively positive data points from the Energy Information Agency (EIA) that included an unexpected draw to distillate stocks and a weekly increase in refined product demand. The Federal Reserve’s highly anticipated announcement Wednesday afternoon that kept rates unchanged, helped weaken the dollar, which contributed to the rise in oil prices. The front-month contract for Brent settled up 4.1 percent at $33.10/bbl and WTI’s front-month contract settled on the NYMEX at $32.30/bbl (up 2.7%). Oil markets were also encouraged by further speculation that a possible Russia-OPEC agreement to curb oil production could take place.

The Energy Information Agency (EIA) released its closely-watched Weekly Petroleum Status Report Wednesday, which showed an increase to U.S. crude inventories of 8.4 million barrels (versus analyst estimates of a build of 3.3 million barrels). Crude prices gained off the newsflow as it did not reaffirm bearish sentiment in the market, which had taken hold after the American Petroleum Institute (API) released Tuesday evening its weekly estimates of crude and refined product inventories. The API estimated crude inventories rose by a staggering 11.4 million barrels, which led to oil slipping as much as 4 percent in after-market trading on Tuesday. All told, crude inventories remain at 80-year highs, according to the EIA, and that has provided a ceiling to any price rallies.

The U.S. refining utilization rate fell to 87.4 percent from 90.6 for the week ending January 22nd, which was expected as many refineries are entering into a seasonal maintenance period that results in taking capacity offline. Considering the build-up to “Snowzilla,” and the severe cold weather and precipitation it brought to the U.S. East Coast, it is not surprising to see that distillate stocks (which include diesel and heating oil) decreased by 4.1 million barrels for the week ending January 22nd. According to the EIA, gasoline inventories rose by 3.5 million barrels and are at the high end of the average range. Gasoline consumption is down 2.5 percent over the last four weeks versus the same period last year. The decrease in gasoline consumption year/year plays into the theory that the benefits to demand growth from historically low pump prices have been exhausted, which is a drag on oil prices.  The EIA data also showed that U.S. crude production remains resilient and stood at 9.2 million b/d for the week ending January 22nd.

In what would seem like an unholy alliance – considering the two countries are essentially fighting a proxy war in Syria – there was speculation in the market Monday (and then again, Wednesday) that Russia and Saudi Arabia (the de facto head of OPEC) would agree to coordinated crude output cuts to help stem the freefall in global oil prices. The comments made by an Iraqi oil minister on the sidelines of an oil conference Monday encouraged more bullish sentiment in the market. It should be carefully considered, however, the track record of such attempts between Russia and OPEC to cooperate on output cuts. In the early 2000s, Russia reneged on a similar proposed agreement. Furthermore, it is curious that Iraq, a long-standing geopolitical rival of Saudi Arabia, and a major “intra-OPEC competitor” of Saudi Arabia and its Gulf allies for crude exports would make such comments about Saudi Arabia’s intentions.

Notwithstanding the major diplomatic and technical hurdles to arriving at an agreement for a coordinated output cut between Russia and OPEC, the market is moving into a slightly more optimistic phase. After seeing the net short position reach record levels earlier in the month, there are signs that a more bullish outlook was taking hold among some traders, with an uptick in long positions.