Oil Tumbles After Unexpected Crude Inventory Build

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A mixed bag of crude draw and gasoline builds from API combined with IEA comments on rising US Shale output offset by Saudi jawboning about more production cuts possible has pushedoil green before today’s DOE data. However, oil prices tumbled when DOE printed an unexpected 2.347mm barrel crude build (1mm draw expected) and another major build in gasoline inventories. US crude production remains at 9-month highs.

As Bloomberg’s Julian Lee notes,

Crude inventories rose in contrast to the draw reported yesterday by the API, combined with another big jump in gasoline, is going to undo all the good work done by Saudi Arabia’s oil minister in Davos trying to talk up prices.

API

  • Crude -5.042mm (-1mm exp)
  • Cushing -1.01mm (-500k exp)
  • Gasoline +9.75mm
  • Distillates +1.17mm

DOE

  • Crude +2.347mm (-1mm exp)
  • Cushing -1.274mm (+300k exp)
  • Gasoline +5.951mm (+2mm exp)
  • Distillates -968k (+1.5mm exp)

Following DOE’s big builds last week, this week’s data snubbed API’s draw with a surprising build of 2.347mm barrels in crude and another large build in gasoline inventories…

 

Crude inventories rose everywhere except for Cushing…

 

As Bloomberg notes, U.S. Combined crude oil and refined products inventories last week were 44 million barrels above the same week in 2016 and a whopping 296 million barrels, or 28%, above the 2010-2014 average for the first week of the year.

 

Two weeks into OPEC’s first agreement to cut production in almost a decade, its top official’s assessment is “so far, so good,” and ever hopeful to jawbone, Barkindo added that at $55 a barrel crude remains “far away from the equilibrium price.”

Saudis also jawboned desperately…

Saudi Arabia’s energy minister says there’s a chance of another production cut from OPEC countries this year.

 

Speaking at the World Economic Forum at the Swiss ski resort of Davos, Khalid Al-Falih says he “would not exclude” another cut to follow last year’s December agreement if higher prices don’t stick.

However, oil-price gains will trigger a “significant” increase in U.S. shale output as OPEC and other producers rein in supply, according to the head of the International Energy Agency.

“U.S. shale-oil production will definitely react strongly,” Executive Director Fatih Birol said Wednesday in a Bloomberg Television interview in Davos, Switzerland. At $56 to $57 a barrel, “a lot of shale plays in the United States would make perfect sense to produce.”

And we note that US crude production continues to trend higher with lagged oil rig counts… strongly suggesting more US supply to come…

Gasoline demand over the four weeks ended Jan. 13 reached the lowest point in almost three years…

 

The market is underestimating U.S. shale’s ability to react to current prices, says Ole Hansen, head of commodity strategy at Saxo Bank. He also thinks there’s a risk oil will to drop to $50 a barrel.

I think the EIA numbers are conservative. When you look at the hedging activity continuing to go up and funding costs continue to go down, there is real increased incentive to get those drills out in the fields again.

 

The focus in the coming months is on production from the U.S., Iraq, Nigeria and Libya. But in the short term we need to basically see how much compliance we are seeing. OPEC’s reports should give us the first gauge and also the emergence of tanker tracking firms makes it a little bit more difficult to lie.

 

But U.S. shale is coming back. And we are underestimating its ability to react to current prices. We see hedging activity in the futures market rising and hitting record levels in WTI. We are seeing the cost of funding collapsing. The number of rigs coming back to work is rising; yes, they need to replace expiring rigs but at least we are seeing an upward trend. I think there is a risk we could be surprised how quickly they will return to previous levels. And that will be a headache.

It would be impressive if EIA reports large builds like API did and the market remains up, Kyle Cooper, director of research with IAF Advisors in Houston, says by phone. “The market is wanting to believe that OPEC is cutting”