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.”
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.”
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.
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