Oil Prices Rise Modestly off Lower Inventory Numbers

Oil prices rose immediately following Wednesday’s release of the Energy Information Agency’s (EIA) Weekly Petroleum Status Report. The report showed a surprise drop to gasoline inventories. After Tuesday’s market close, the American Petroleum Institute (API) reported estimates that U.S. gasoline inventories had risen 2.2 million barrels for the week ending Aug. 12. As a result, oil fell slightly in aftermarket trading – based off fears that the glut in petroleum products was expanding, which would drag on crude demand.

The gain in prices was short-lived, however, and oil started to trade lower throughout the day, partially due to the fact that a key technical level – the 50-day moving average at $46.23 per barrel – had been breached, resulting in profit-taking. The Aug. 16 minutes from the July Federal Reserve meeting revealed discordance over whether a rate rise should occur in 2016, which weakened the dollar and helped boost oil prices.

The front-month West Texas Intermediate (WTI) contract settled relatively flat on the NYMEX at $46.79 per barrel, while the Brent front-month contract rose 1.3 percent on the ICE to $49.85 per barrel.

A short-covering rally began late last week off comments made by Saudi Energy Minister Khalid al-Falih that OPEC members and other large producers would hold talks about a potential coordinated output freeze on the sidelines of a conference in Algeria to be held in late September. The track record is poor for obtaining any type of agreement on coordinated production cuts within the Organization of the Petroleum Exporting Countries (OPEC) – and even more so between OPEC and non-OPEC producers, e.g., the Doha meeting in April ended abruptly when Saudi Arabia walked out of talks at the last minute.

Although the chances for reaching an agreement are slim, the efficacy of any coordinated output freeze to lead to higher oil prices is even more remote. OPEC’s major Middle Eastern members are producing at record levels; Saudi Arabia is potentially on pace to eclipse Russia as the world’s largest producer of crude. In July, the Kingdom hit record production of 10.67 million barrels of oil per day (MMbpd) and has signaled that it may reach a new high of 10.9 MMbpd for the month of August.

As the battle for market share intensifies within OPEC, there is little hope that production levels will be throttled, even in the face of a global crude supply glut. Iraq’s production edged up in recent months and was at 4.6 MMbpd in July and is expected to continue on an upward trajectory. Iran’s oil ministry has stated the country will not be a party to any deal to freeze production until it reaches pre-sanction output levels of between 4 MMbpd to 4.2 MMbpd. It does not anticipate reaching these levels by end of September – the time of the meeting in Algeria. Although the two countries have always been aligned militarily in Syria, there is evidence that bilateral cooperation between Iran and Russia could be deepening. With Russia’s unprecedented move Tuesday to use an Iranian base to launch airstrikes in Syria, which undoubtedly caused unease in Saudi Arabia, it raises the question that perhaps an alliance of sorts might form concerning oil production as well. Both Iran and Russia are vying against Saudi Arabia for market share, especially in Asian markets.

Despite these factors, such chatter about a possible freeze has nevertheless buoyed markets, and speculators are positioning themselves for a lift in prices – however fleeting it may prove to be – as the fundamentals still point to an oversupplied market. The EIA reported that for the week ending Aug. 12, crude inventories fell 2.5 million barrels, versus expectations for a build of 522,000 barrels. Gasoline inventories fell 2.7 million barrels, versus expectations for a draw of 1.6 million barrels, while distillate stocks (including diesel and heating oil) increased 1.9 million barrels. Although U.S. gasoline demand is still showing strength, and is 1.7 percent higher than it was during the same period last year, the fact remains that an overwhelming and historic crude and petroleum supply overhang exists of 1.4 billion barrels, according to the EIA. U.S. crude production also rose about 100,000 bpd week over week to 8.6 MMbpd.

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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