Crude Oil Prices Bounces Higher Following Big Drop in Gasoline Supply

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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 900,000 barrels last week, maintaining a total U.S. commercial crude inventory of 534 million barrels. The commercial crude inventory remained at the upper limit of the average range for this time of year.

Tuesday evening the American Petroleum Institute (API) reported that crude inventories rose by 1.9 million barrels in the week ending March 24. API also reported gasoline supplies decreased by 1.1 million barrels and distillate inventories decreased by 2 million barrels. For the same period, an S&P Global Platts survey of analysts had consensus estimates for an increase of 300,000 barrels in crude inventories, a decline of 2.1 million barrels in gasoline inventories and a drop of 1.1 million barrels in distillate stockpiles.

Total gasoline inventories decreased by 3.7 million barrels last week, according to the EIA, and remain in the upper half of the five-year average range. Total motor gasoline supplied (the agency’s measure of consumption) averaged over 9.3 million barrels a day for the past four weeks, down by 1% compared with the same period a year ago.

With crude prices stuck below $50 a barrel, there are likely to be some investors and traders who are waiting/hoping that new production from U.S. shale plays will stop or, even better, begin to contract. They could be in for a long wait, according to analysts at Wood Mackenzie.

Research analyst Andy McConn explains:

Recent disclosures reveal that producers rushed to lock in oil prices above US$50 a barrel after OPEC’s November announcement about production cuts. Our peer group of producers added a higher volume of oil hedges during Q4 than in any of the previous four quarters. Those producers – most of which are highly exposed to US tight oil – will use hedging gains to help plug any budget deficits caused by sub-US$50 spot prices.

Most of the hedges expire by 2018. Oil futures prices must recover before producers can lock in prices over US$55 a barrel for next year, which is what we think is needed to organically fund significant tight-oil production growth.

The 33 companies in WoodMac’s cohort added an annualized 648,000 barrels a day to their hedge positions in the fourth quarter of 2016, up a third year over year. Most have strike prices between $50 and $60 a barrel. Two producers, Apache and Anadarko, added the most hedges, accounting for 28% of all new volume. Price volatility, contract structures and hedge dates present arbitrage opportunities, but, as the saying goes, markets can remain volatile longer than you can remain solvent.

Before the EIA report, benchmark West Texas Intermediate (WTI) crude for May delivery traded down about 0.4% at around $48.55 a barrel, and it rose to $48.80 shortly after the report’s release. WTI crude settled at $48.37 on Tuesday. The 52-week range on May futures is $41.67 to $57.50.

Distillate inventories fell by 2.5 million barrels last week and remain in the upper half of the average range for this time of year. Distillate product supplied averaged about 4.2 million barrels a day over the past four weeks, up 13.1% compared with the same period last year. Distillate production averaged about 4.9 million barrels a day last week, up about 100,000 barrels a day compared with the prior week’s production.

For the past week, crude imports averaged over 8.2 million barrels a day, down by about 83,000 barrels a day compared with the previous week. Refineries were running at 89.3% of capacity, with daily input averaging over 16.2 million barrels, about 425,000 barrels a day more than the previous week’s average.

According to AAA, the current national average pump price per gallon of regular gasoline is $2.291, down slightly from $2.293 a week ago and up less than a penny compared with the month-ago price. Last year at this time, a gallon of regular gasoline cost $2.041 on average in the United States.

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 up about 0.2%, at $81.99 in a 52-week range of $80.31 to $95.55. Over the past 12 months, Exxon stock has traded down about 3.2% and is down nearly 21% since August 2014, as of Tuesday’s close.

Chevron Corp. (NYSE: CVX) traded up about 0.4%, at $107.57 in a 52-week range of $92.43 to $119.00. As of last night’s close, Chevron shares have added about 12.4% over the past 12 months and trade down nearly 20% since August 2014.

The United States Oil ETF (NYSEMKT: USO) traded up about 1.4%, at $10.30 in a 52-week range of $8.99 to $12.45.

The VanEck Vectors Oil Services ETF (NYSEMKT: OIH) traded up about 1.2% to $30.55, in a 52-week range of $25.13 to $36.35.