Rising Crude Oil Inventory Stifles Prices After Volatile Week

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The U.S. Energy Information Administration (EIA) released its weekly petroleum status report Wednesday morning. U.S. commercial crude inventories increased by 2.5 million barrels last week, maintaining a total U.S. commercial crude inventory of 523.6 million barrels. The commercial crude inventory remains at historically high levels for this time of year, according to the EIA.

Tuesday evening the American Petroleum Institute (API) reported that crude inventories jumped by 4.6 million barrels in the week ending August 19. API also reported gasoline supplies decreased by 2.1 million barrels and distillate inventories saw a drawdown of 800,000 barrels. For the same period, analysts had estimated a decrease of around 455,000 barrels in crude inventories, along with a drop of 1.7 million barrels in gasoline supplies and a 400,000-barrel increase in distillates.

Total gasoline inventories remained unchanged last week, according to the EIA, and remain well above the upper limit of the five-year average range. Total motor gasoline supplied (the agency’s measure of consumption) averaged over 9.7 million barrels a day for the past four weeks, up by 1.8% compared with the same period a year ago.

Since posting a low of around $40 a barrel in early August, crude prices had risen by nearly $10 a barrel by last Friday to close the week at $49.11. Much of that gain resulted from talk about a potential freeze on production from OPEC members and, perhaps, Russia. But crude dropped nearly $2 a barrel on Monday before gaining some of that back on Tuesday. And the loss was mounting in Wednesday trading.

A dose of reality may have set in. Saudi Arabia and Russia continue to produce at record levels, so a production freeze now is nearly meaningless. Iran has said it will not consider freezing production until it reaches pre-sanctions levels of around 4.0 million to 4.2 million barrels a day. In July, Iran produced 3.6 million barrels a day, and raising production by 400,000 to 600,000 barrels a day in a month is unlikely to happen.

And there is also the impact of short covering in the futures market. The Commodities Futures Trading Commission (CFTC) reported that hedge funds and money managers increased their long positions by some 48 million barrels in the seven-day period ended August 16. Reuters noted the reaction:

[H]edge fund managers convinced that oil prices would fall further were wrong-footed by the sudden rally. Short positions were reduced by 114 million barrels (31 percent) between Aug. 2 and Aug. 16.

The furious race to buy back short positions sent prices higher. Front-month Brent futures prices jumped from $41.50 a barrel on Aug. 2 to $49.23 on Aug. 16 and continued rising to reach $50.88 on Aug. 19 for an increase of more than 20 percent.

The recoil in short positioning was particularly violent in the WTI contract on the New York Mercantile Exchange.

Hedge funds had established a record short position of 220 million barrels in NYMEX WTI by Aug. 9, but this was followed by a record one-week 54 million barrel reduction in short positions by Aug. 16.

Between August 9 and August 16, benchmark West Texas Intermediate (WTI) for October delivery added about $4 a barrel.

Before the EIA report, WTI crude for October delivery traded down about 1.3% at around $47.50 a barrel and fell to around $47.05 shortly after the report’s release. WTI crude settled at $48.10 on Tuesday. The 52-week range on October futures is $33.28 to $54.34.

Distillate inventories increased by 100,000 barrels last week and remain near the upper limit of the average range for this time of year. Distillate product supplied averaged over 3.7 million barrels a day over the past four weeks, unchanged when compared with the same period last year. Distillate production averaged over 4.8 million barrels a day last week, down about 100,000 barrels a day compared with the prior week’s production.

For the past week, crude imports averaged over 8.6 million barrels a day, up by 449,000 barrels a day compared with the previous week. Refineries were running at 92.5% of capacity, with daily input averaging about 16.7 million barrels, about 186,000 barrels a day less than the previous week’s average.

According to AAA, the current national average pump price per gallon of regular gasoline is $2.189, up from $2.131 a week ago and up more than two cents compared with the month-ago price. Last year at this time, a gallon of regular gasoline cost $2.595 on average in the United States.

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Here is a look at how share prices for two blue-chip stocks and two exchange traded funds reacted to this latest report.

Exxon Mobil Corp. (NYSE: XOM) traded down about 0.2%, at $87.58 in a 52-week range of $66.15 to $95.55. Over the past 12 months, Exxon stock has traded up about 21.6% and is down about 15% since August 2014, as of Tuesday’s close.

Chevron Corp. (NYSE: CVX) traded down less than 0.1%, at $101.65 in a 52-week range of $70.95 to $107.58. As of the most recent close, Chevron shares have added about 34.2% over the past 12 months and trade down about 24% since August 2014.

The United States Oil ETF (NYSEMKT: USO) traded down about 2%, at $10.88 in a 52-week range of $7.67 to $16.20.

The VanEck Vectors Oil Services ETF (NYSEMKT: OIH) traded down about 0.6% to $28.83, in a 52-week range of $20.46 to $32.78.