Oil Prices Fall Despite Large Drawdown in Gasoline Inventories

Despite a larger than expected draw in gasoline stocks, oil prices fell after the Energy Information Agency’s (EIA) Weekly Petroleum Status Report, which showed a surprise build in crude inventories for the week ending Aug. 5. Both U.S. and international benchmarks fell almost 2 percent off the newsflow.

The front-month West Texas Intermediate (WTI) contract settled down 2.5 percent on the NYMEX at $41.71 per barrel, while the Brent front-month contract fell 2.1 percent on the ICE to $44.05 per barrel.

According to the EIA, the U.S. refinery utilization rate fell approximately 1 percent week over week, from 93.3 percent to 92.2. The East Coast (PADD 1) refinery utilization rate fell to 80.6 percent – the lowest level since 2011. The region saw a large uptick in imports of gasoline blending components (a refinery output) week over week, which could partially explain why refineries were run at such low capacity.

With the refinery maintenance season occurring in about a month’s time – which dramatically reduces crude demand – traders are concerned that the oversupply in oil and product inventories will not find an outlet to absorb the excess.

For the week ending Aug. 5, the EIA reported an increase to crude stocks of 1.1 million barrels, versus expectations for a draw of .8 million barrels. Gasoline showed a surprisingly large draw of 2.8 million barrels, versus expectations of a decrease of .8 million barrels.

Although the drawdown in gasoline stocks is a positive for crude, it is outweighed by the fact that the summer driving season – a time for peak demand – is soon coming to a close and inventories are at high levels. At 235.4 million barrels, gasoline stocks are 9.2 percent above levels during the same period in 2015. Distillate stocks fell 2 million barrels versus analyst estimates of a build of .5 million barrels.

There is evidence that oil market speculators are making increasingly bearish bets on crude prices and positioning accordingly. The move to short positioning in oil could prove to be overdone given that, compared to the 10-year historical average (and adjusting for seasonality), both crude and petroleum inventories are actually within the normal range. It should also be noted that demand for petroleum products remains relatively strong in the United States, with the EIA reporting that total products (including gasoline, diesel, and jet fuel) supplied over the last 4-week period was up almost 2 percent versus the same period last year.

There is still plenty of downside risk to consider concerning oil prices – particularly from the supply side, but any slightly positive data points could potentially move oil prices upward – off of massive short-covering by these same speculators.

Also weighing on oil prices Wednesday was the release of OPEC’s Monthly Oil Market Report, which showed the cartel producing at a record high in July, at 33.11 million barrels per day (MMbpd) . As Saudi Arabia, Iraq and Iran increasingly vie for market share, it appears there will be no let-up in each nation’s crude output.

In fact, Saudi Arabia boosted its July production to a historical high of 10.67 MMbpd (with the incremental growth destined for the export market as it was reported domestic demand is declining). Additionally, the EIA released its Short-term Energy Outlook Tuesday, which included upward revisions to U.S. oil production for 2016 and 2017, at 8.73 MMbpd and 8.31 MMbpd, respectively.

Certain OPEC members, namely Venezuela, have been talking up the possibility of a coordinated freeze coming out of proposed talks on the sidelines of an oil conference that's taking place in September in Algeria. Chances are slim though that any material impact to prices would occur, even if members agree to an arrangement to hold production – given that the largest producers in the cartel are producing at full hilt.

Delia Morris has worked in the international upstream oil & gas industry for over 12 years, and is currently Director, Global Energy Sector at Stratfor, a geopolitical intelligence firm that provides strategic analysis and forecasting services. Please contact Delia at delia.morris@stratfor.com.


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