Oil Prices Gain Despite Record-High Crude Inventory Data

After hitting a two-month high Tuesday off the hope of a coordinated oil output freeze among approximately 70 percent of the world’s major crude producers, oil prices slipped after the market close and the American Petroleum Institute (API) released its estimates for crude inventories for the week ending Feb. 26. The report showed that crude inventories rose by 9.9 million barrels (versus analyst expectations for a build of just 2.6 million barrels).

Wednesday on the NYMEX, the front-month WTI contract settled up about 1 percent at $34.66/bbl, while the Brent front-month contract was up less than half a percent on the ICE to $36.93/bbl.

Oil prices continued to fall Wednesday morning after the Energy Information Agency (EIA) reported its closely watched Weekly Petroleum Status Report for the week ending Feb. 26. The front-month contract for WTI dropped sharply (2 percent) on the NYMEX immediately following the release of the EIA’s report, which confirmed the API’s earlier, larger-than-anticipated estimates for crude stocks. The EIA data showed that at Cushing, Okla., the delivery point for the WTI contract, oil stocks rose 1.2 million barrels week over week to 66.3 million barrels. Crude stocks in the U.S. are at 518 million barrels, a level not seen in 80 years. The EIA reported that gasoline inventories decreased 1.5 million barrels and that distillate stocks (which include diesel and heating oil) rose 2.9 million barrels week over week.

Despite the mostly bearish fundamentals, and resultant deepening oil market contango – as the world seemingly runs out of places to store crude and refined products - bullish bets are being made that an oil price rebound is upon us, or at least a floor has possibly been reached. Net long positions on the ICE for Brent crude are up more than 12 percent in the past week, a level not seen in almost five years. This phenomenon is occurring despite the fact that the prospect for oil prices should remain depressed during the next month or so as refineries in the U.S. switch over to summer gasoline blends (which dampens crude demand during this planned downtime period), and oil and product storage becomes tighter, globally.

The bullish bets on an oil price recovery are predicated partly on the notion that U.S. shale oil producers are finally curtailing production. Monday, the EIA published monthly data that estimated December 2015 crude production at 9.3 million barrels per day (versus a yearly average for 2015 of 9.43 MMbpd). In Wednesday’s weekly data, the EIA reported that production fell 25,000 bpd to 9.077 MMbpd. The front-month contract for both WTI and Brent settled up on the day after a choppy day of trading. Oil prices could also have been buoyed by news that the government of Saudi Arabia, possibly feeling the pinch of low oil prices, is seeking a $10 billion loan. With evidence that U.S. onshore production is falling, plus signs of increased cooperation among major OPEC and non-OPEC producers to work toward stabilizing prices via a freeze (and possibly an output cut down the line - once an adequate assessment of the amount of Iranian crude coming into the market is made), a supply response to the global oil glut looks feasible.

On the demand side, oil markets were slightly optimistic on data points from the EIA Wednesday that gasoline inventories fell week over week and that gasoline demand over the last four weeks was up almost 7 percent versus the same period last year. However, it should be noted that outside the U.S., especially in China, demand for commodities in general is falling. The Baltic Dry Index, long a measure of global trade, and a good proxy for economic activity, has hit its lowest levels in February 2016, since hitting a peak in May 2008.


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