Oil Continues Positive Momentum off Stronger than Expected Product Demand

Encouraged by continued promises for a possible output freeze and stronger than expected refined product demand data from the Energy Information Agency (EIA), oil rose Wednesday to a three-month high. Since March 4, both front-month contracts for the U.S. crude benchmark (WTI) and the global crude benchmark (Brent) have settled above the important psychological level of $35/bbl. The EIA released its closely watched Weekly Petroleum Status Report Wednesday morning showing greater than expected draws in both gasoline and distillate stocks (which includes diesel and heating oil). The front-month contract for WTI rose 3 percent on the NYMEX following the EIA report and the front-month contract for Brent rose over 2 percent on the ICE, pushing it above $40/bbl.

The front-month WTI contract settled up almost 5 percent at $38.29/bbl Wednesday, while the Brent front-month contract settled up 3.6 percent on the ICE to $41.07/bbl.

Before the report’s release, the market was already anticipating relatively strong product demand numbers based off of the American Petroleum Institute’s (API) weekly crude and product inventory report, which is released after market close on Tuesdays. In that report, the API estimated that for the week ending March 4, crude inventories rose by 4.4 million barrels; gasoline stocks fell by 2.1 million barrels; and, distillate stocks fell by .1 million barrels.

The EIA’s weekly data was supportive to oil prices as it showed that gasoline demand over the last four weeks was up 7 percent versus the same period last year. Total products supplied were also higher (+1.3 percent) over the last four-week period versus the same time last year. Oil markets have been closely watching for signs that a slowdown in U.S. onshore production is taking hold. With drastic cuts to capital budgets and a significant drop to the onshore rig count over 2015 levels, the market is seeing a gradual slowdown in production. The EIA data showed that U.S. production (including offshore) stayed flat week over week at about 9.1 million barrels per day. Although crude inventories showed a larger than expected build of 3.9 million barrels (versus analyst estimates of a 3.1 million barrel increase), levels were potentially limited by less crude imports week over week (-244,000 barrels per day) and an increase in the refinery utilization rate from 88.1 percent to 89.3 percent week over week. At the same time, U.S. crude inventories remain at 80-year highs at 522 million barrels; and, at Cushing, OK, the delivery point for the WTI contract, stocks rose 600,000 barrels week over week.

Although the slowdown in U.S. onshore production is a positive for oil prices, that alone will not ultimately lift prices out of the current downturn. The market is growing more optimistic for a potential crude output freeze among major producers, including Saudi Arabia, Qatar, Venezuela and Russia. To that end, a meeting is scheduled sometime this month, which also attempts to get buy-in from other major producers such as Iran and Iraq. While a freeze could be viewed as a step in the right direction toward stabilizing oil prices, it is a risky proposition given the lack of political and economic will to forge such a deal, and considering that production would be set at January 2016 levels – which were at record highs for many of the countries involved.

Currently, according to many sources, the global oil market has approximately one billion barrels in storage, which, in light of tepid demand, and the absence of a coordinated cut (not freeze) in major OPEC and non-OPEC production, could prolong the eventual rebalancing of supply and demand. China – the world’s second largest consumer of crude – released extremely weak economic data for the month of February, showing that exports fell to levels not seen since the financial crisis in 2009. Consensus is that the global crude markets should trend toward equilibrium starting in the second half of 2017, but that might be pushed out further given the mostly bearish fundamentals, to which the oil market does not seem to be currently focused.


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