Oil Prices Drop off Extremely Bearish EIA Data
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Wednesday morning, oil prices fell precipitously after the Energy Information Agency (EIA) released its Weekly Petroleum Status Report that showed a record build in crude inventories of 14.4 million barrels for the week ending Oct. 28. Analysts had been anticipating an increase of about 1 million barrels – both the U.S. and global benchmarks fell approximately 3 percent off the newsflow.
Markets were bracing themselves for bearish data around crude stocks following the American Petroleum Institute’s (API) release after the market close Tuesday that estimated a build of 9.3 million barrels for the week ending Oct. 28.
The front-month U.S. West Texas Intermediate (WTI) contract settled down 2.9 percent Wednesday on the NYMEX at $45.34 per barrel, while the Brent front-month contract fell 2.7 percent on the ICE to $46.86 per barrel.
The surprisingly large build to crude inventories was reflective of a sizeable uptick in weekly imports, of 2 million barrels per day. Refineries also operated at a lower rate week over week, from 85.6 percent down to 85.2 percent. U.S. crude production rose by 18,000 barrels per day to 8.52 million barrels per day.
Due to the shutdown during the previous week of the 850,000-barrel per day Seaway Pipeline that connects between the U.S. Gulf Coast and Cushing, OK – the point of delivery for the WTI contract – many traders were anticipating a sizeable build there. Cushing, OK crude inventories rose by 2.7 million barrels for the week ending Oct. 28.
The EIA also reported a larger than expected drop in gasoline inventories of 2.2 million barrels, versus analyst estimates of a decrease of about 1.1 million barrels. Distillate stocks (including diesel and heating oil) fell by 1.8 million barrels versus expectations for a drop of 1.9 million barrels.
The EIA data only compounded already less optimistic sentiment concerning the potential effectiveness of a coordinated output cut between the Organization of Petroleum Exporting Countries (OPEC) and, possibly, other large producers. As has been the case over the last few months, OPEC and Russia have been producing at record levels. For the month of October, according to some estimates, OPEC’s crude output was as high as 33.8 million barrels per day, while Russia hit a new post-Soviet record of 11.2 million barrels a day.
The agreement to cut output, which will ostensibly be ironed out at the official OPEC meeting in Vienna on Nov. 30, proposes to shave off up to 700,000 barrels per day. Given weak demand and the fact that global oil markets are oversupplied by as much as 1 million barrels per day, it will not be significant enough to balance markets.
Meanwhile on Tuesday, Saudi Aramco’s CEO Amin Nasser stated that the company sees global demand and supply coming into balance soon, and forecasts oil prices rising sometime in the first half of 2017. Knowing that all major oil producers in OPEC and outside OPEC are waging a fierce battle for market share, it is apparent that Saudi Arabia, Russia, Iran and Iraq will logically continue undercutting each other on their marketed crude, which will only lead to further drops in price levels.
With global crude demand growth slowing down, it appears unlikely that Saudi Aramco’s view of oil markets is a plausible scenario. This doesn’t jibe well with its plans for a partial initial public offering (IPO) in 2017, which would benefit greatly from a higher oil price. However, as was evidenced with the last run-up in the oil price, rhetoric from OPEC, led by Saudi Arabia, that it was dedicated to stabilizing oil markets was the key to a rally. The rally coincided nicely with Saudi Arabia’s issuance of the largest emerging market debt offering of $17.5 billion, which was predicated on higher oil prices.
With today’s extremely bearish EIA data release, and the consequent dip in prices, it appears that the fundamentals are driving the market and not OPEC noise.
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 firstname.lastname@example.org
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