Oil – Fundamental Analysis

Oversupply concerns dominated crude markets this week as prices fell more than -7% week-on-week,  completely reversing what had been an over-buying situation into one of over-selling. The OPEC+ group’s decision to continue to increase output coupled with an across-the-board build in inventories weighed on prices. After starting the week as high as $65.40/bl. Monday, WTI fell to a low of $60.40/bl. Thursday, ending the week at $60.82 on Friday. In a similar pattern,  Brent crude hit its high on Monday at $69.90/bl. with its low of $64.00/bl. occurring Thursday as well.  Prices haven’t been this low since the end of May. Both grades settled lower week-on-week. The WTI/Brent spread has tightened to ($4.00).  

At its next coordination meeting, the OPEC+ group is expected to not only agree to increase output but may do so at even higher levels as it seeks to restore the second tranche of cuts which totaled 1.6 million bld. As a result, the daily output increases could double or triple current levels. It should be noted that analysts continue to monitor the real production levels which the group has historically not met. Meanwhile, Iraq has restarted about 150k to 160k bld. from the Kurdish region.  Additionally, the furloughing of thousands of federal employees tied to a government shutdown are negative for energy consumption at all levels. And the marketplace in general is concerned about the interruption of the flow of key One supportive sign is China’s buying of oil for its strategic reserves mostly due to the lower market prices.

The Energy Information Administration’s Weekly Petroleum Status Report (still released despite the government shut-down) indicated that commercial crude oil inventories for last week increased by +1.8 million bl. to a total of 416.5 bl. million and -4% below the 5-year average. The API forecasted a -3.7 million bl. drop while market analysts forecasted a +0.3 million decline. US refinery utilization dipped to 91.4% from 93.0%. That represents -310k bpd. change in inputs to 16.2 million bpd. Total motor gasoline stocks increased +4.1 million bl. to 221 million bl. and right at the 5-year average. Gasoline demand was +150k bpd to 9.0 million bpd. vs. 8.85 the week prior and 8.5 a year ago. Distillates increased +0.6 million bl. to 123.6 million Bbl. and are now at -6% below the 5-year average. Inventory at the key Cushing, OK hub changed -270k Bbl. to 23.5 million Bbl. or 32% of capacity. The SPR was +740k bbl. to 406.7 million bbl. Imports of crude oil were -700k bpd. to 5.8 million Bbld. vs. 6.5 the prior week while exports were 3.8 million bpd. vs. 4.5 the prior week. Exports of petroleum products were 7.2 million bpd. last week vs. 7.2 the prior week. Total US oil production was 13.5 million bld. vs. 13.3 last year at this time. The US oil rig count fell -2 last week to 422 while gas rigs were +1 at 118. Total US rigs are now 549 vs. 585 last year at this time.

AAA’s average US retail gasoline prices at the pump were most recently reported at $3.152/gal., -$0.004/gal. vs. last week, -0.038 /gal. from last month and -$0.038/gal. less than a year ago.

 The ISM’s purchasing index rose last month to 49.1 from August’s 48.7. While higher, readings below 50 indicate contraction in the sector although it’s occurring at a slower rate. Despite this and the government shutdown, all (3) major US stock indexes set new Highs this week, but the NASDAQ settled lower week-on-week.  The USD Is lower which may have helped crude late week gains.