Weekly WTI Crude Oil Inventory Analysis: EIA release of 21st February

Summary of last weeks’ change in Crude Inventories figures:

API: +3 mb

EIA Consensus:  +2 mb

EIA actual: +4.14 mb

An overall bearish EIA release exacerbated an already negative sentiment in crude markets today, with oil inventories increasing 2 mb more than analysts forecasted. On top of the headline number, a second consecutive large gain in US crude production once again highlighted a market that is fundamentally oversupplied.

The Breakdown

Following last week’s 1% rise in US production, this week saw another large rise of 0.8% or 54, 000 b/d. Production now stands at the highest point since August 1992 and is experiencing its fastest growth rate in the recent uptrend, allowing for outlying events.

This large uptick in production comes at a time when seasonal demand for crude is normally low, confirmed by the fact that refiners once again reduced their crude inputs, this week by a gross rate of 170,000 b/d. This decline resulted in a utilisation rate of 82.9%, 0.9%pts down from last week. While a low rate is normal for this time of year, as shown on the chart below, the effects for crude demand and thus prices are nevertheless on the downside.

The amounts of petroleum products supplied demonstrated the reasons for low refinery utilisation, with distillate fuel oil supplied, which includes heating oil, falling by -134,000 b/d after last week’s drop of -31,000. This contrasts to the amount of gasoline supplied which has been on average flat for the last four weeks, experiencing modest fluctuations. Due to seasonal demand, gasoline supplied may not increase dramatically until the spring and summer driving seasons.

The fundamental oversupply of the market is well demonstrated by the above-average level of ‘days-supply’, representing how many days the current inventories could fuel the US economy. As the chart shows, while an increasing DS is normal for this time of year, the level and rate of increase is the last few weeks is the highest amount in the last 10 years.

On a regional level, stocks at Cushing were seen to increase by 417,000 barrels, but by the far the biggest increase is inventories was seen on the Gulf State where stocks rose by 3.469 million. Such a rise is normal for this time of year, as stocks were depleted for a mixture of both tax purposes in the run up to January as well as for use in heating fuel production. However while Gulf states are still about 2 million barrels below the point they normally reach in the summer, inventories of the Gulf Coast will likely play a high part in analysis over the coming months as various pipelines from the current supply glut in the Midwest are completed (see my previous post, Seaway No Solution, for more detail)

How Markets Reacted

Markets were already in a downward trend after losing a large amount of ground yesterday, caused by a number of factors including rumours that a hedge fund was liquidating a large position, minutes from the FOMC meeting showing that monetary authorities believe the time for QE may be coming to an end, the API report coming in as an increase in inventories and the fact that a major technical support level was breached, thus triggering sell orders.

While it might be thought that the bearish EIA report was a justification of this downward trend, the WTI graph below shows that the price actually increased slightly on release at 11am (chart in US time). Despite an increase of up to $0.60, the price eventually fell back down an hour later.

Next week’s release

While demand signs were the main focus of markets from EIA releases in the first few weeks of the year, supply concerns have truly come to the foreground since the beginning this week. Indeed if production carries on increasing at the dramatic rates seen in the last couple of weeks, the WTI-Brent differential may face further divergence as demand for the excess crude simply does not exist at this early stage in the economic recovery. Hence this could be a key concern in next week’s release.