Weekly WTI Crude Oil Inventory Analysis: EIA release of 17th April

Summary of today’s release: last weeks’ change in Crude Inventories figures:

API: -6.7m

EIA Consensus:  +1.2m

EIA actual: -1.2m

Crude continued its bearish run today, with both grades dropping by more than 2% in the face on an EIA report that continued to remind traders of the fragile demand and supply situation in the US. While overall crude stocks dropped, the cause of this fall seemed to be a reduction in imports rather than an improving US demand situation. Indeed, the detail showed that US domestic production had increased while refinery input decreased. These factors, combined with a large stock-build at Cushing and a fall in distillate and gasoline products supplied to consumers, reinforced the current bearish outlook.

Detailed Breakdown

US domestic crude production climbed 27,000 barrels to reach 7.2mb/d last week, while net refinery input dropped by 40,000 b/d. The fall in refinery input only represents a 4% drop in the gains seen over the preceding 4 weeks, and could be a result of the continued softness of crude product demand in the shoulder period between winter fuel and summer gasoline peak demand. Such a demand situation was confirmed in this release, with gasoline product supplied falling by 94k/d and distillate fuel by -226k/d.

The bearish reaction to the drop in stocks may also have been caused by details in the regional breakdown. Despite the -1.2mb fall, the region that caused this decline was the demand heavy West Coast, where stocks fell by -1.8mb. Meanwhile, there was a 1mb rise at Cushing, with stocks there reaching the highest point since January. With a lot of traders focussed on transportation bottlenecks, such a sign is worrying as it implies crude might be finding its way to Cushing but not onward to the Gulf Coast. Such an idea may have been affected by the recent completion of the line-fill of the Longhorn pipeline, which was completed last week. This process was taking up some crude from the system, but actual deliveries are not expected until this week, and so this could have caused the temporary build-up (For more on that see my previous post Seaway No Solution).

How Markets Reacted

Brent has been on a bearish run since 2^nd April, when the grade reached $111.8 before dropping by $14.1 to end today at $97.7. WTI began its bearish run a few days earlier, falling from $97.7 to reach just under $87 today. Clearly there is a bearish sentiment in the market, and as in other weeks we’ve seen market reacting positively despite a negative headline number, this week we see markets reacting negatively despite a positive headline number.

As the chart shows, the Brent price initially ticked up slightly at 14:30 GMT after the release, but soon dropped by about $0.90 as analysts saw the details and continued to drop by a further $0.5 before rebounding slightly after the European closed. WTI followed a similar pattern, and both grades dropped on the day.

Outlook: How Low Will It Go?

US production reaching a 20-year high was hailed as a major headline by some news outlets, but in reality we already saw that headline a few weeks ago, and will likely continue to see it this year. As regular followers of the EIA report will know, the details can be overshadowed by the current market sentiment, with what we’ve seen over the past two weeks of a bearish market possibly being a correction to the previous weeks in which crude has increased endlessly despite bearish details and a loose market. Hence it’s difficult to predict next week’s release, but crude will likely rebound at some point, albeit perhaps temporarily.

In particular, technical indicators such as the RSI show that WTI could be due a rebound before the end of this week. As the day-chart below shows, WTI has reached a new low while the RSI has failed to reach a lower low than the one two days ago. This is known as an RSI bullish divergence, as detailed in my previous post of technical trading strategies.