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Key Reasons for Oil's Lower Settlement Despite Supply Drop

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U.S. oil prices fell on Thursday, as investors looked past the Energy Information Administration’s ("EIA") storm-induced draws in crude and fuel stockpiles, instead turning their attention to China’s surprise announcement to auction off oil from its national reserve to soften spiraling feedstock costs for domestic refiners.

On the New York Mercantile Exchange, WTI crude futures lost $1.16 or 1.7%, to settle at $68.14 a barrel.

Below we review the EIA's Weekly Petroleum Status Report for the week ending Sep 3.

Analyzing the Latest EIA Report

Crude Oil: The federal government’s EIA report revealed that crude inventories fell by 1.5 million barrels compared to the expectations of a 7.4-million-barrel decline per the analysts surveyed by S&P Global Platts. The combination of a drop in domestic production and lower imports — both related to the Hurricane Ida-led shut-ins in the Gulf of Mexico facilities — accounted for the stockpile draw with the world’s biggest oil consumer. However, the magnitude of decrease was far lower than expected as the storm knocked out refinery demand too. This puts total domestic stocks at 423.9 million barrels — 15.3% less than the year-ago figure and 6% lower than the five-year average.

On a somewhat bearish note, the report showed that supplies at the Cushing terminal (the key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange) were up 1.9 million barrels to 36.4 million barrels.

Meanwhile, the crude supply cover was up from 26.5 days in the previous week to 27.2 days. In the year-ago period, the supply cover was 35.8 days.

Let’s turn to the products now.

Gasoline: Gasoline supplies decreased for the sixth time in eight weeks. The 7.2-million-barrel plunge is attributable to the hurricane fallout on the Gulf Coast’s widespread refinery network. Analysts had forecast that gasoline inventories would fall by 2.4 million barrels. At 220 million barrels, the current stock of the most widely used petroleum product is 5.1% less than the year-earlier level and 4% below the five-year average range.

Distillate: Distillate fuel supplies (including diesel and heating oil) fell for the second week in a row. The 3.1-million-barrel drop reflected refineries sidelined by Hurricane Ida. Meanwhile, the market looked for a supply decline of 2 million barrels. Current inventories — at 133.6 million barrels — are 24% below the year-ago level and 12% lower than the five-year average.

Refinery Rates: Refinery utilization, at 81.9%, was down 9.4% from the prior week.

Wrapping Up

Oil prices settled lower yesterday after China’s plans to release stockpiles from reserves stoked fears of a supply glut even as global oil consumption remain strong following the relaxation of movement curbs. Besides, analysts cited this week’s hefty inventory declines as temporary as most production platforms in the Gulf were evacuated in anticipation of Hurricane Ida.

Nevertheless, the overall Oil/Energy market is surely on the mend with a supportive macro backdrop and robust fundamentals. Widespread COVID-19 vaccine rollouts, the ongoing government stimulus and the OPEC+ supply curtailments have contributed to this positive setup.

Crude supplies are now at their lowest levels since September 2019, with U.S. commercial stockpiles down nearly 16% since mid-March. There is also a marked improvement in gasoline demand on the back of rebounding road and airline travel. With all the tailwinds, the U.S. benchmark briefly hit a more than six-year high of $76.98 in July.

The Energy Select Sector SPDR — an assortment of the largest U.S. companies thronging the space — has risen some 26.1% year to date against a 21.5% gain for the broader S&P 500 benchmark. As far as companies within the index are concerned, shale stocks like Devon Energy DVN, EOG Resources EOG, Diamondback Energy FANG, Occidental Petroleum OXY and Marathon Oil MRO have done well so far this year.

Devon Energy, carrying a Zacks Rank #1 (Strong Buy), is the top-performing energy stock with a gain of 82.78%. Marathon, Diamondback, Occidental and EOG have also enjoyed outsized gains of 70.16%, 56.32%, 44.83% and 36.77%, respectively.

You can see the complete list of today’s Zacks #1 Rank stocks here.

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