Crude Closes in on $40: Will OPEC Outcome Keep it There?

U.S. oil prices settled at a three-month high on Wednesday after a weekly report from the Energy Information Administration ("EIA") revealed that domestic crude stockpiles fell unexpectedly, led by a sizeable drawdown at the storage hub in Cushing. On the New York Mercantile Exchange, July WTI crude gained 48 cents, or 1.3%, to settle at $37.29 a barrel, the highest settlement since Mar 6.

Analyzing the Latest EIA Report

Below we review the EIA's Weekly Petroleum Status Report for the week ending May 29.

Crude Oil: The federal government’s EIA report revealed that crude inventories fell by 2.1 million barrels, versus expectations for a 3.5 million barrels increase. A drop in imports, increased refining activity and transfer into the Strategic Petroleum Reserve accounted for the surprise stockpile decrease with the world's biggest oil consumer. This puts total domestic stocks at 532.3 million barrels – 10.1% above the year-ago figure and 12% over the five-year average.  

The latest report also showed that supplies at the Cushing terminal in Oklahoma (the key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange) was down 1.7 million barrels to 51.7 million barrels.

The crude supply cover was down from 41.7 days in the previous week to 41.3 days. In the year-ago period, the supply cover was 28.9 days.

Let’s turn to products now.

Gasoline: Gasoline supplies tallied an increase for the second time in three weeks. The fuel’s 2.8 million barrels build is attributable to higher production. Analysts had forecast 300,000 barrels fall. At 257.8 million barrels, the current stock of the most widely used petroleum product is 10.1% higher than the year-earlier level and is 10% above the five-year average range.

Distillate: Distillate fuel supplies (including diesel and heating oil) jumped for a ninth straight week. The 9.9 million barrels increase reflected a dropoff in demand. Meanwhile, the market had been looking for a supply build of 2.8 million barrels. Current supplies — at 174.3 million barrels — are 34.7% higher than the year-ago level and 28% above the five-year average.

Refinery Rates: Refinery utilization was up 0.5% from the prior week to 71.8%.  

Conclusion

Overall, oil supplies have been steadily dwindling as easing lockdown measures improve the demand outlook from coronavirus-hit lows. The report was also supportive in terms of U.S. producers scaling back operations. Weekly figures show output has dropped to 11.4 million barrels per day, since reaching 13.1 million in the second week of March.

In particular, volumes from United States’ number one basin – Permian - is set to fall by 87,000 bbl/d month over month to 4.3 MMbbl/d in June – the second 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 nearly 18% since March, while domestic fuel demand remains weak. As it is, another steep build in distillate inventories in the latest report kept traders worried.

Again, despite a marginal rise in refinery runs, utilization in the United States is still close to its lowest level ever. 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.

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As a proof of the demand destruction, EIA estimates U.S. oil consumption in 2020 is expected to plunge by 2.2 million barrels per day to 18.29 million barrels per day.   

Looking forward, all eyes are focused on the outcome of the OPEC+ virtual meeting, which will discuss the group’s oil supply management policy.

Member countries of the OPEC+ group, looking to shore up prices, have started to withhold output by almost 10 million barrels per day – the largest in history – from May 1. Per the plan, the initial reduction would last for two months. Beginning July, the production cap would be relaxed to 8 million barrels per day through the remainder of this year. However, heavyweights Saudi Arabia and Russia have reportedly agreed to extend the record cuts beyond July – by a month at least.

Should the OPEC meeting fall short of expectations, prices could turn lower. Therefore, while the current trend for crude is slowly turning positive with a record monthly gain in May, serious questions remain about the future direction of oil.

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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
 
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Diamondback Energy, Inc. (FANG) : Free Stock Analysis Report
 
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