Oil Market Cherry Picking USA Inventory Data

Oil Market Cherry Picking USA Inventory Data
Rigzone's regular market watchers take a closer look at U.S. inventory data, Shell and ConocoPhillips' major Permian deal, Covid developments and more.

(The views and opinions expressed in this article are those of the attributed sources and do not necessarily reflect the position of Rigzone or the author.)

In this week’s edition of oil and gas industry hits and misses, Rigzone’s regular market watchers take a closer look at U.S. inventory data, Shell and ConocoPhillips’ major Permian deal, Covid developments and more. Read on to find out what they had to say.

Rigzone: What were some market expectations that actually occurred during the past week – and which expectations did not?

Barani Krishnan, Senior Commodities Analyst at investing.com: One certain surprise is that oil markets seem to be cherry picking U.S. inventory data to keep a bullish tilt on crude prices even as gasoline stockpiles rose last week. The other is that some 16 percent of oil production in the U.S. Gulf Coast of Mexico remains shut in almost a month after Hurricane Ida, a phenomenon that no one really could have foreseen at that time.

Jon Donnel, Managing Director, B. Riley Advisory Services: The front-month WTI contract rose to its highest price since July as demand remains robust and production in the Gulf of Mexico has not returned to pre-Hurricane Ida levels. Total product supplied has remained above 20 million barrels per day on a four-week rolling basis during the third quarter, the first time that has happened since 1Q20. Overall U.S. production remains below 11 million barrels per day, only recovering about one-third of the decrease attributable to the recent hurricanes. As a result, crude inventories declined for the sixth straight week and stand at levels below the comparable period in 2019. Overall, supply and demand fundamentals remain supportive for commodity prices heading into the end of the year.

Michael Osina, Grant Thornton National Partner in Charge of Energy – Tax: Rig counts continue to slowly climb as many experts are forecasting more stable oil pricing. Covid continues to be the wildcard for the energy industry as the potential impact of vaccine mandates leave a lot of uncertainty as to how it will affect the travel industry. However, with Biden announcing the relaxing of travel restrictions for vaccinated foreign passengers, this could provide a positive impact on the economy and thus the energy industry as well. 

Rigzone: What were some market surprises?

Krishnan: U.S. crude stockpiles dropped by 3.481 million barrels in the week to Sept. 17, the Energy Information Administration said in its weekly update on inventories. Analysts tracked by Investing.com had forecast a drop of 2.45 million barrels for the week. In the previous week to Sept. 10, crude draws ballooned to 6.422 million barrels, almost double to expectations due to Ida-related disruptions. The larger than expected drawdown for a second week in a row puts crude prices in a better stead, no doubt. Distillates inventories, which include diesel and heating oil, fell by 2.55 million barrels last week against expectations for a draw of 1.11 million barrels, the EIA data showed. In the previous week, distillate inventories fell by 1.69 million barrels. Arguably, this too helps the case for oil prices.

What’s puzzling though is how the market decided to give a complete miss to gasoline stockpiles, which showed a surprising build of 3.47 million barrels last week, compared with forecasts for a draw of 1.47 million barrels. Gasoline is a weekly datapoint more important than distillates, and sometimes even crude. It forms the biggest demand component for oil. Demand for gasoline is down from the summer peak of 9.4 million barrels a day to around 8.8 million barrels now. In the previous week, gasoline stockpiles fell 1.86 million. This time it totally bucked the market’s downtrend. And what did the market do? It decided to reward bulls in crude with a two percent price hike on Wednesday.

As for Ida impact, some 16 percent of crude production in the U.S. Gulf Coast of Mexico, accounting for 294,414 barrels equivalent, remained shut-in as of Wednesday. While the continued outage remains surprising somewhat, it was still markedly lower than last week’s shut-in levels of 25 percent.

Donnel: ConocoPhillips acquired acreage and production in the Permian basin from Shell for $9.5 billion earlier in the week. RDS has been up front about its desire to lower its carbon footprint over time, but it was surprising to see COP step in as the buyer of such a large transaction given its recent purchase of Concho and its focus on returning cash to shareholders as described in its 10-year plan laid out in June. That said, the transaction has been well received by the market as COP announced an increase to its regular dividend. The company updated its long-term forecasts and expects the deal to produce incremental free cash flow and additional upside to higher commodity prices, while lowering greenhouse gas intensity over the 10-year period. The deal highlights the relatively low cost of supply from Permian Basin assets and the benefits of acreage consolidation for operators.

Osina: Industry experts have kept an interested eye on the new administrations tax policy as it affects the energy industry. In the most recent version of the draft tax legislation, there were some notable omissions from the mark-up, including the expected repeal of many oil and gas tax incentives. It is unclear if this is now off the table or if it simply got scrapped because it was going to be a hard sell to convince enough support for those measures.   

To contact the author, email andreas.exarheas@rigzone.com

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