Crude Futures Dip as Doubts About Outlook Remain

Market Trends - 04/10/2017

The US West Texas Intermediate crude oil benchmark is retreating again towards the key psychological threshold of $50.00 as a myriad of factors conspire to cloud the outlook for energy prices.  Despite several powerful drivers in the backdrop, the post-hurricane recovery of refinery operations alongside climbing US production could take the wind out of the latest rally’s sails.  Advance data announced by the American Petroleum Institute late in Tuesday’s session noted that the draw-down in crude oil stockpiles continued last week, with inventories tumbling by 4.08 million barrels.

However, this contrasted sharply with the pickup in refining activities which have almost entirely recovered from the outages that severely damaged output.  Gasoline inventories outpaced the decline in comparable oil stocks, rising by a stunning 4.91 million barrels and marking the single biggest build since January.  This marked increase has raised the specter of another supply-demand mismatch near-term, especially considering the summer driving season is over and demand is likely to continue tapering over the next few months.

Apart from the inventory data, production continues to amplify the supply-side problem facing oil prices.  Even though tightening supplies were enough to drive the recent gains in prices, especially amid the acceleration in US oil exports which reached 1.491 million barrels through the week ended September 22nd, rising production and an increasing rig count threaten to reverse the trend higher.

According to last week’s EIA data, total US production including Alaska rose to 9.547 million bpd for the same period covering the export data, returning to normal as producers also add drill rigs.  Baker Hughes reported the first weekly gain in rotary rig drilling in four weeks last Friday, with the count climbing by 6 to 750 total operational rigs.  This may indicate the potential for further production gains over the comings weeks and months, offsetting the draw-downs precipitating in onshore storage facilities.  Without a further re-balancing of supply and demand conditions, oil prices may trend below the $50.00 level until next summer despite ongoing OPEC efforts to clear the inventory glut.

 

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