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Oil Breaches $50 a Barrel on Inventory Draw, China Talks

Nilanjan Choudhury

The U.S. Energy Department's inventory release showed that crude stockpiles recorded a weekly draw but product inventories (gasoline and distillate) rose sharply.

Amid these conflicting signals, the commodity was propped up by Saudi Arabia’s promise to lower its oil exports, while it also drew support from the OPEC+ production cut agreement. Continued optimism surrounding talks between the United States and China to resolve the trade war and easing fears of a possible economic slowdown also boosted prices.

As a result, the front month West Texas Intermediate crude futures gained 5.2% (or $2.58) to settle at $52.36 per barrel yesterday – the highest settlement since Dec 13.

Analysis of the EIA Data

Crude Oil: The federal government’s EIA report revealed that crude inventories fell by 1.7 million barrels for the week ending Jan 4, following a marginal increase of 7,000 barrels in the previous week. The analysts surveyed by S&P Global Platts – the leading independent commodities and energy data provider – had expected crude stocks to go down some 1.4 million barrels.

Notwithstanding past week’s decline, oil inventories have generally trended higher over the past few months. As a proof, stockpiles are up nearly 40 million barrels since September. Consequently, the U.S. crude market has shifted from year-over-year storage deficit to a surplus. At 439.7 million barrels, current crude supplies are 4.8% above the year-ago figure and 8% over the five-year average.

Moreover, the latest report shows that stocks at the Cushing terminal in Oklahoma – the key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange – rose 330,000 barrels to 42.3 million barrels.

The crude supply cover was down slightly - from 25.2 days in the previous week to 25.1 days. In the year-ago period, the supply cover was 24.2 days.

Gasoline: Gasoline supplies tallied a sixth straight week of gains. The 8.1 million barrels addition – significantly above the polled number of 4.2 million barrels rise and the largest weekly increase in more than two years – took gasoline stockpiles up to 248.1 million barrels. Following last week’s hefty build, the current stock of the most widely used petroleum product is about 4.6% above the year-earlier level and 5% over the five-year range.

Distillate: Distillate fuel supplies (including diesel and heating oil) climbed 10.6 million barrels last week, while analysts were looking for an inventory build of just 4.3 million barrels. The large increase could be attributed to softening demand. Despite the big build, current supplies – at 140 million barrels – still remain 2.2% lower than the year-ago level and 5% below than the five-year average.

Refinery Rates: Refinery utilization was down by 1.1% from the prior week to 96.1%.

About the Weekly Petroleum Status Report

The Energy Information Administration (EIA) Petroleum Status Report, containing data of the previous week ending Friday, outlines information regarding the weekly change in petroleum inventories held and produced by the U.S., both locally and abroad.

The report provides an overview of the level of reserves and their movements, thereby helping investors understand the demand/supply dynamics of petroleum products. It is an indicator of current oil prices and volatility that affect the businesses of the companies engaged in the oil and refining industry.

The data from EIA generally acts as a catalyst for crude prices and affect producers, such as ExxonMobil XOM, Chevron CVX and ConocoPhillips COP, and refiners such as Valero Energy VLO, Phillips 66 PSX and Marathon Petroleum MPC.

Want to Own an Energy Stock Now?

While easing oversupply concerns and hopes of U.S.-China trade deal helped oil to squirt past $50, it remains to be seen if it can maintain the recent gains. One factor that could undermine the efforts to tighten the market is the seemingly relentless increase in crude oil production across the U.S. shale patch.

There remains a lot of uncertainty around the commodity right now, which can lead to volatility and price fluctuations. At this time, it might be prudent for investors to maintain caution — either withdraw for a while or look for fundamentally sound stocks.

If you are looking for a near-term energy play, Unit Corporation UNT might be a good selection. Unit has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The 2018 Zacks Consensus Estimate for Unit is 98 cents, representing some 81.5% earnings per share growth over 2017. This year’s average forecast is $1.81, pointing to another 84.7% growth.

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