Oil prices plunged on Wednesday following data showing a massive buildup of crude oil inventories in the U.S., pushing WTI down to $45 per barrel, the lowest level since September.
Oil stocks grew by 14.4 million barrels in the last week of October, the EIA said on Wednesday, the highest weekly increase on record. That was enough to push oil down by more than 3 percent, erasing just about all of the gains made since OPEC stoked the fire back in September with tentative plans to cut their production levels.
The 14 million barrel increase was exceptional by any standard, and it vastly exceeded the consensus estimate by an array of analysts, which, according to Reuters, called for an increase of just 1 million barrels. "This is very, very, very bearish. Nothing else in the report matters," James L. Williams, energy economist at WTRG Economics, said in a Reuters interview. Bob Yawger, director of the futures division at Mizuho Securities USA, agreed. “You could easily make the argument it’s the most bearish report of all time. There’s nothing to support the market,” he told The Wall Street Journal. “All the barrels you were wondering what ever happened to them came roaring back in one report.”
Oil prices were already falling because of doubts over OPEC’s willingness and ability to cut a deal. After the latest flop in Vienna, the deep discord within OPEC makes a deal of any significance hard to imagine. "There were already worries about the OPEC agreement. It could take longer to rebalance the market, even if they succeed in finalizing the accord,” Joe Bozoyan, an equity portfolio manager at John Hancock, told Bloomberg. Related: Will Oil Majors Ever Recover?
With pessimism creeping into the market because of OPEC, oil was already down into the $40s before the EIA data was released on Wednesday. The inventory build, pushed WTI down to $45 per barrel. "I wouldn't be surprised if by the end of the week or beginning of next week, we'll get to $42 or $41 a barrel, as very few believe OPEC will make cuts that matter,” Tariq Zahir, an oil trader with Tyche Capital Advisors, told Reuters.
That echoes an estimate from Goldman Sachs, which saidWill Oil Majors Ever Recover? this week in a note to clients that a failure at OPEC’s upcoming meeting would send oil prices down to the low $40s per barrel.
Leaving OPEC aside, there are a few reasons that the EIA’s “most bearish report of all time” may not be quite as bearish as it first seems. Gasoline inventories continued to decline, falling by another 2.2 million barrels at the end of October, so demand is holding up. Meanwhile, production levels are more or less flat, so the stock build is not because of some dramatic increase in upstream oil production. Related: Saudi Arabia’s Oil War Gained It 1% Market Share – Which It Is About To Lose
But the biggest reason that the EIA report might be an anomaly is the steep increase in oil imports, which helps explain the sharp jump in inventories. U.S. oil imports shot up to 9 million barrels per day in the last week of October, 2 mb/d higher than the week before and at the highest level since 2012. Imports had been lower in recent weeks, so the sudden surge at the end of October inflated the stock build figures. Because higher imports were essentially dumped into storage, there is little reason to believe that the U.S. will continue to import at such an elevated rate. As imports return to more normal levels in the weeks ahead, weekly changes in inventories will fall back to more normal levels.
The effect then, could be that oil regains a bit of ground as the markets start to digest the fact that the inventory build does not indicate some renewed glut in the market. To be sure, the fundamentals are still weak, but little has changed from previous weeks other than the fact that the U.S. imported more oil than average in the last week of October.
But beyond that potential short-term snap back effect, OPEC’s squabbles still loom large over the market. Their proposed cuts were never that deep to begin with, but the psychological effect has been huge. As such, the risk to oil prices over the next few weeks is more on the downside than it is on the upside.
By Nick Cunningham of Oilprice.com
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