Oil Falls On Larger Than Expected Builds, Strengthening Supply Picture

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After the International Energy Agency (IEA) reported Tuesday that it sees the global crude glut persisting through at least the first half of 2017, and that it was revising downward its 2016 global demand growth figures for oil consumption by 100,000 barrels per day to 1.3 million barrels per day, oil markets continued to reflect a more dour outlook Wednesday.

Following the release of the Energy Information Agency’s (EIA) Weekly Petroleum Status Report, oil prices gained off the headline news that crude inventories fell, versus analyst expectations for a build, but soon reversed course – falling by 2 percent, when traders dug deeper into the numbers, which showed record stockpiles of crude and refined products – of about 1.4 billion barrels.

The front-month WTI contract settled down 2.9 percent Wednesday on the NYMEX at $43.58 per barrel while the Brent front-month contract fell 2.7 percent on the ICE to $45.85 per barrel.

For the week ending Sept. 9, the EIA reported that U.S. crude inventories fell by about 600,000 barrels, versus expectations for a build of about 3.8 million barrels. Gasoline stocks rose by about 600,000 barrels, versus expectations for an increase of about 340,000 barrels. Distillate (including diesel and heating oil) showed a large increase of 4.6 million barrels, versus expectations for a build of 1.5 million barrels.

The U.S. refinery utilization rate fell .8 percent week over week to 92.9 percent. The higher than anticipated builds to product inventories, yet lower throughput rates, point to a weaker than expected product demand picture. Although the Labor Day weekend is traditionally one of the strongest weeks for gasoline demand, there is anecdotal evidence that many drivers were forced to stay off the roads because of inclement weather, thus lowering the draw on gasoline. Total products supplied for the week ending Sept. 9 was down 1.1 million barrels per day versus the previous week.

Oil prices had fallen partially Monday off data released by the Organization of the Petroleum Exporting Countries (OPEC) that non-OPEC production, chiefly from the United States, Russia, and Norway, was higher than had been anticipated. In its September Monthly Oil Market Report, OPEC stated – in what looked like an about-face from its August report – that non-OPEC production was on pace to be about 190,000 barrels per day higher in 2016 than what was previously estimated. Given these conditions, namely, greater than expected output from non-OPEC countries, the cartel sent the message that the chances for agreement around a coordinated freeze at an upcoming meeting among OPEC members in Algiers were almost non-existent.

The EIA reported Wednesday that U.S. production had risen by 35,000 barrels per day for the week ending Sept. 9, to about 8.49 million barrels per day – adding a data point to the OPEC argument that increasing U.S. drilling activity (as evidenced by a continuously increasing weekly oil rig count) and production that appears resistant to falling below the 8 million barrel per day threshold are reasons enough to continue the cartel’s push to increase output to record levels, despite faltering global demand.

Since Nov. 27, 2014 when OPEC, led by Saudi Arabia, decided to “let the market decide” oil prices, intense competition among members for market share has ensued. Individual cartel members have been acting in their own self-interest by going after market share, even to the detriment of other members. Saudi Arabia, Iran and Iraq represent the most competitive and material players in the cartel, and have benefited from production outages in OPEC member countries that have been riven by political strife, such as Venezuela, Nigeria and Libya.

Production from Libya has been discounted from the market since the Arab Spring and the subsequent fall of Moammar Gadhafi. In June 2010, the country’s output was about 1.6 million barrels per day. Since 2011, Libya’s production has fluctuated to a low of 80,000 barrels per day, to a high of 1 million barrels per day. The country produced about 292,000 barrels per day in August, according to OPEC’s latest report.

On Wednesday, Libyan Prime Minister Fayez al-Sarraj, who leads the country's U.N.-backed Government of National Accord, called for unity talks days after rival forces seized key oil facilities. Forces under Gen. Khalifa Hifter, leader of the powerful Libyan National Army, took control of several key oil ports (including, Brega, Ras Lanuf, Al-Sidra and Zuwaytania) from the central branch of the Petroleum Facilities Guard over the past weekend. The United States and European powers condemned Hifter's move, and U.N. special envoy to Libya Martin Kobler is scheduled to speak on the situation before the U.N. Security Council Sept. 14. Al-Sarraj said Libya has reached a "turning point" and called for inclusive talks to avoid any serious escalation in violence.

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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