After 17 straight weeks of builds, Cushing sees a draw on crude inventories

Global oversupply has prompted companies to sell production volumes on the future strip prices, pushing their production into storage hubs like Cushing, Oklahoma. Since the beginning of the year, the U.S. Department of Energy (DOE) reported massive crude oil inventory builds for 17 straight weeks, with inventory numbers blowing past the five-year average.

Today, the DOE released the official stats on crude oil inventories, showing the first draw on crude oil storage so far this year. According to the crude oil inventories numbers for the week ended May 1, 2015, there was a draw of 3,882 MBO, lowering total inventories to 487,030 MBO.

The draw on inventories contributed to prices for West Texas Intermediate (WTI) breaking through the $60 barrier yesterday, giving some hope that prices may be coming back up from their bottom in the low $40 per barrel range. “$60 per barrel was not that large of a barrier, but there was still resistance,” says Jason Constas, managing director at Scottsdale Capital Consulting. “The fact that oil broke above that level should mean it will reach $80 per barrel.”

Crude Price

Source: Bloomber WTI Three Month Price Chart

Why now?

“It’s hard to know for sure exactly why we’re seeing this now, but it comes from supply and demand,” Wunderlich Securities Chief Market Strategist Art Hogan told Oil & Gas 360® in a phone interview today.

“We haven’t really seen production flatten, and we probably won’t have a good feel for supply until June, but we could be seeing more demand as refiners come out of maintenance,” Hogan said.

Refinery utilization is up, too, supporting higher demand. A research note released by Wells Fargo today shows refinery utilization is at 93% up 1.7% from the week before.

Crude prices trending upward

This is likely [to be] a trend that will continue upward says Hogan, albeit at a slower rate. “The climb from the low $40 per barrel mark to the $60 mark was quick. Prices will keep moving up, but it will probably be at a slower rate.” Jason Wangler, senior vice president of Equity Research at Wunderlich, said prices would stay below their earlier highs, as well.

“We’re still in an oversupplied market,” said Wangler. “Until we see some more production come off, $90 to $100 per barrel still doesn’t make much sense.”

Hogan said he thinks production is likely to slow, even as analysts wait for more accurate numbers later this year.

“We’ll have a better idea about what the supply side of the equation is doing in June,” said Hogan, “but in the meantime, I don’t expect we’ll see more rigs drilling in this price range.

“$65 to $70 per barrel [WTI] is where we can expect to see some more production becoming economical again.”

Hogan’s exclusive OAG360 interview from The Oil & Services Conference earlier this year is posted here.

Tom Petrie, co-founder of Petrie Partners, told Oil & Gas 360® that seasonality was likely behind the recent draw, but he was not convinced that prices would continue to trend upwards. The seasonal pick up in demand may not continue to support prices down the road, says Petrie.

Petrie’s exclusive Top Minds in the Business interview can be seen here.

At the time of today’s posting, WTI has come off of a day’s high of $62.58 per barrel to $60.91.

Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. The company or companies covered in this note did not review the note prior to publication. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.

Legal Notice