Oil Falls on Fundamentals; Freeze Talk Uplift Losing Steam

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It does not necessarily reflect the views of Rigzone.

Both U.S. and global crude benchmarks fell immediately following Wednesday morning’s release of the Energy Information Agency’s (EIA) Weekly Petroleum Status Report, which showed a surprisingly large weekly increase in crude inventories. The front-month contract for West Texas Intermediate (WTI) dropped by almost 3 percent while Brent slipped about 2.5 percent in morning trading.

The market was already anticipating bearish data around crude inventories after Tuesday’s market close when the American Petroleum Institute (API) released estimates for the week ending Aug. 26. Estimates showed an increase in U.S. oil stocks of 942,000 barrels over the previous week.

The front-month WTI contract settled down 3.6 percent Wednesday on the NYMEX at $44.70 per barrel while the Brent front-month contract fell 2.7 percent on the ICE to $47.04 per barrel.

The EIA reported a much larger than expected increase to U.S. crude inventories – of 2.3 million barrels, versus analyst estimates of a build of 1.2 million barrels. Standing at 1.4 billion barrels, crude and petroleum products in storage are at historic highs.

For the week ending Aug. 26, the EIA reported that gasoline inventories fell by .7 million barrels, versus expectations for a drawdown of 1.2 million barrels. Although gasoline production fell week over week, demand also fell by about 150,000 barrels per day. This is surprising during the last week of August, which marks the height of the summer driving season. The EIA also reported an uptick in total motor gasoline imports, which could have also contributed to the smaller than expected decrease to gasoline stocks.

Distillate stocks, which includes diesel and heating oil, showed a surprise build of 1.5 million barrels over the previous week, versus estimates for a decrease of about 200,000 barrels. U.S. oil production fell by 60,000 barrels per day to 8.49 million barrels per day, representing a much slower pace to the expected drop-off in crude output.

The bearish data prompted a sell-off in a market that has few positive catalysts for oil prices, given faltering global demand growth and an overwhelming supply picture. Oil prices Tuesday were pushed down by a strong U.S. dollar, which hit a three-week high, after it was reported that U.S. consumer confidence had risen to a level not seen since September 2015.

Traders are giving little credence to the potential for an agreement to freeze production among Organization of the Petroleum Exporting Countries (OPEC) members at an upcoming meeting at the end of September. The market reacted positively in intra-day trading Tuesday when Iraqi President Haider al-Abadi made comments at a conference that indicated that the country would be willing to agree to a freeze. Considering that Iraq is also openly committed to increasing already record production that exceeds 4 million barrels per day, as stated recently by newly appointed oil minister Jabar Ali al-Luaibi, there is little merit to such remarks.

Another complicating factor to a possible agreement is with Iran, which has been firm about it only participating in freeze talks when it has crossed its pre-sanction production threshold of 4 million barrels per day. Although the country has asserted that it will reach this level by the end of 2016; it will not, however, be producing at that rate during the time of the meeting in Algeria.

In the end, it is Saudi Arabia, the largest OPEC producer, which can move the oil market by its actions. Regarding the upcoming meeting in Algeria, Saudi Energy Minister Khalid al-Falih has been non-committal about intervening in the markets. Given the country’s imperative to grow market share, amid the price downturn and drastically reduced government revenue that is fueling increasing social upheaval among its populace, it seems the only choice is for Saudi Arabia to continue maximizing output.

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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