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What to Make of Yesterday's Dramatic Drop in Oil Prices

Nilanjan Choudhury
·10 mins read

U.S. oil prices slumped on Wednesday after the Energy Department's inventory release showed a surprise addition to crude stockpiles that took it to fresh record levels.

Adding to oil's woes, investors remain worried about a second wave of coronavirus infections. As several U.S. states experience a spike in new coronavirus infections and hospitalization, there are apprehensions that the country was perhaps premature in re-opening its economy. Resurgence in cases of the deadly pandemic could lead to another lockdown with many businesses forced to close again just after reopening. Moreover, this would create doubts around the trajectory of oil's nascent demand recovery.

Data from the International Monetary Fund showing a worse-than-expected global economic collapse also pushed prices lower.

On the New York Mercantile Exchange, August WTI crude lost $2.36, or 5.9%, to settle at $38.01 a barrel.

Analyzing the Latest EIA Report

Below we review the EIA's Weekly Petroleum Status Report for the week ending Jun 19.

Crude Oil: The federal government's EIA report revealed that crude inventories rose by 1.4 million barrels, versus expectations for a 100,000 barrels decrease. A rebound in domestic production primarily accounted for the surprise stockpile increase with the world's biggest oil consumer. This puts total domestic stocks at 540.7 million barrels - the highest on record, 15.1% above the year-ago figure and 16% over the five-year average.

Meanwhile, oil prices drew some support from another stockpile draw at the Cushing terminal in Oklahoma. The key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange saw inventories decline 991,000 barrels to 45.8 million barrels.

The crude supply cover was down from 40.4 days in the previous week to 39.9 days. In the year-ago period, the supply cover was 27.4 days.

Let's turn to products now.

Gasoline: Gasoline supplies tallied a decrease for the second straight week. The fuel's 1.7 million barrels decline is attributable to stronger demand that continues to recover from the unprecedented rout associated with coronavirus. Analysts had forecast a fall by 1.9 million barrels. At 255.3 million barrels, the current stock of the most widely used petroleum product is 9.9% higher than the year-earlier level and is 9% above the five-year average range.

Distillate: Distillate fuel supplies (including diesel and heating oil) increased for the 11th time in 12 weeks. The marginal, 249,000 barrels increase reflected higher production and lower demand. Meanwhile, the market had been looking for a supply build of 100.000 barrels. Current supplies - at 174.7 million barrels - are 39.3% over the year-ago level and 28% above the five-year average.

Refinery Rates: Refinery utilization was up 0.8% from the prior week to 74.6%.

Conclusion

The crude inventory rise, yet again, surprised the market, which was expecting a decline. Supplies are now at their highest weekly level on record, topping the former all time high of 539.3 million barrels achieved in the previous week. On a slightly positive note, oil at the storage hub in Cushing continued to fall.

Another potential headwind to come out of the report was a rebound for U.S. production, which rose after 13 weeks. Nevertheless, the fact remains that U.S. producers have scaled back operations significantly. Weekly figures show current output at 11 million barrels per day, down from 13.1 million in mid-March.

In particular, volumes from United States' number one basin - Permian - is set to fall by 7,000 bbl/d month over month to 4.3 MMbbl/d in July - the third month of decline, as the likes of Diamondback Energy FANG, Cimarex Energy XEC, Concho Resources CXO, Pioneer Natural Resources PXD and others invest a lot less money into the unconventional play in 2020.

The pockets of bullish data in the report notwithstanding, investors still remain worried of the supply glut. In total, U.S. commercial stockpiles are up by around 20% since March, while domestic fuel demand, though improving, remains weak. As it is, another build in distillate inventories in the latest report kept traders worried.

Again, despite another rise in refinery runs, utilization in the United States remain far below the usual capacity usage at this time of the year. Downstream operators including Valero Energy VLO, Marathon Petroleum MPC, HollyFrontier HFC - all carrying a Zacks Rank #3 (Hold) - have drastically reduced processing capacity to cope with the demand erosion caused by efforts to stem the spread of the coronavirus. The demand has still not picked up to a level where the operators think of restarting/increasing their refinery work.

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

As a proof of the demand destruction, EIA estimates U.S. oil consumption in 2020 to plunge by 2.4 million barrels per day to 18.06 million barrels per day. On the other hand, Paris-based International Energy Agency ('IEA') projects global crude consumption to fall a record 8.1 million barrels per day to 91.7 million barrels per day in 2020.

Considering these factors, while the OPEC+ production cut extension most likely managed to put a floor under prices, serious questions remain about the future direction of oil.

5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

Today, See These 5 Potential Home Runs >>

U.S. oil prices slumped on Wednesday after the Energy Department's inventory release showed a surprise addition to crude stockpiles that took it to fresh record levels.??

??

Adding to oil???s woes, investors remain worried about a second wave of coronavirus infections. As several U.S. states experience a spike in new coronavirus infections and hospitalization, there are apprehensions that the country was perhaps premature in re-opening its economy. Resurgence in cases of the deadly pandemic could lead to another lockdown with many businesses forced to close again just after reopening. Moreover, this would create doubts around the trajectory of oil???s nascent demand recovery.

??

Data from the International Monetary Fund showing a worse-than-expected global economic collapse also pushed prices lower.

??

On the New York Mercantile Exchange, August WTI crude lost $2.36, or 5.9%, to settle at $38.01 a barrel.

??

Analyzing the Latest EIA Report

??

Below we review the EIA's Weekly Petroleum Status Report for the week ending Jun 19.

??

Crude Oil: The federal government???s EIA report revealed that crude inventories rose by 1.4 million barrels, versus expectations for a 100,000 barrels decrease. A rebound in domestic production primarily accounted for the surprise stockpile increase with the world's biggest oil consumer. This puts total domestic stocks at 540.7 million barrels ??? the highest on record, 15.1% above the year-ago figure and 16% over the five-year average.????

??

Meanwhile, oil prices drew some support from another stockpile draw at the Cushing terminal in Oklahoma. The key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange saw inventories decline 991,000 barrels to 45.8 million barrels.

??

The crude supply cover was down from 40.4 days in the previous week to 39.9 days. In the year-ago period, the supply cover was 27.4 days.

??

Let???s turn to products now.

??

Gasoline: Gasoline supplies tallied a decrease for the second straight week. The fuel???s 1.7 million barrels decline is attributable to stronger demand that continues to recover from the unprecedented rout associated with coronavirus. Analysts had forecast 1.9 million barrels fall. At 255.3 million barrels, the current stock of the most widely used petroleum product is 9.9% higher than the year-earlier level and is 9% above the five-year average range.??

??

Distillate: Distillate fuel supplies (including diesel and heating oil) increased for the 11th time in 12 weeks. The marginal, 249,000 barrels increase reflected higher production and lower demand. Meanwhile, the market had been looking for a supply build of 100.000 barrels. Current supplies ??? at 174.7 million barrels ??? are 39.3% over the year-ago level and 28% above the five-year average.

??

Refinery Rates: Refinery utilization was up 0.8% from the prior week to 74.6%.????

??

Conclusion

??

The crude inventory rise, yet again, surprised the market, which was expecting a decline. Supplies are now at their highest weekly level on record, topping the former all time high of 539.3 million barrels achieved in the previous week. On a slightly positive note, oil at the storage hub in Cushing continued to fall.??

??

Another potential headwind to come out of the report was a rebound for U.S. production, which rose after 13 weeks. Nevertheless, the fact remains that U.S. producers have scaled back operations significantly. Weekly figures show current output at 11 million barrels per day, down from 13.1 million in mid-March.??

??

In particular, volumes from United States??? number one basin ??? Permian - is set to fall by 7,000 bbl/d month over month to 4.3 MMbbl/d in July ??? the third month of decline, as the likes of Diamondback Energy (FANG), Cimarex Energy (XEC), Concho Resources (CXO), Pioneer Natural Resources (PXD) and others invest a lot less money into the unconventional play in 2020.

??

The pockets of bullish data in the report notwithstanding, investors still remain worried of the supply glut. In total, U.S. commercial stockpiles are up by around 20% since March, while domestic fuel demand, though improving, remains weak. As it is, another build in distillate inventories in the latest report kept traders worried.??

??

Again, despite another rise in refinery runs, utilization in the United States remain far below the usual capacity usage at this time of the year. Downstream operators including Valero Energy (VLO), Marathon Petroleum (MPC), HollyFrontier (HFC) ??? all carrying a Zacks Rank #3 (Hold) - have drastically reduced processing capacity to cope with the demand erosion caused by efforts to stem the spread of the coronavirus. The demand has still not picked up to a level where the operators think of restarting/increasing their refinery work.

??

You can see the complete list of today???s Zacks #1 Rank (Strong Buy) stocks here.

??

As a proof of the demand destruction, EIA estimates U.S. oil consumption in 2020 to plunge by 2.4 million barrels per day to 18.06 million barrels per day. On the other hand, Paris-based International Energy Agency (???IEA???) projects global crude consumption to fall a record 8.1 million barrels per day to 91.7 million barrels per day in 2020. The?? ????

??

Considering these factors, while the OPEC+ production cut extension most likely managed to put a floor under prices, serious questions remain about the future direction of oil.??

??

5 Stocks Set to Double

??

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

??

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

??

Today, See These 5 Potential Home Runs >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Valero Energy Corporation (VLO) : Free Stock Analysis Report
 
Pioneer Natural Resources Company (PXD) : Free Stock Analysis Report
 
Concho Resources Inc. (CXO) : Free Stock Analysis Report
 
Marathon Petroleum Corporation (MPC) : Free Stock Analysis Report
 
Cimarex Energy Co (XEC) : Free Stock Analysis Report
 
HollyFrontier Corporation (HFC) : Free Stock Analysis Report
 
Diamondback Energy, Inc. (FANG) : Free Stock Analysis Report
 
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