Despite another bearish report from the EIA on crude inventories, WTI surged 3.6% on Wednesday to around $49.21/bbl, driven by a weakening of the US dollar and geopolitical concerns. Initially, crude fell in morning trading after the EIA released its weekly oil storage report showing that stockpiles grew by 8.2 MMbbl, or 1.8%, to a total of 466.7 MMbbl last week. However, it rebounded sharply on reports of rapidly escalating violence in Yemen and a slide in the dollar following disappointing US durable goods orders for February.
The inventory build handily topped analysts' expectations of a 4.75 MMbbl increase, according to Bloomberg. With stockpiles continuing to climb, every week brings a fresh 80-year record for its spot on the calendar. US crude imports averaged 7.4 MMbbl last week, which was down by 104,000 bo/d over the prior week. US production edged up slightly for the seventh consecutive week to 9.42 MMbo/d. That was the smallest growth in production since January, but still meant that domestic output was at its highest level in more than 30 years.
The release of the EIA's storage report on Wednesday has become the main feature among upstream analysts and crude traders, largely taking the place of waiting for the Baker Hughes rig count to be released, which held the spotlight earlier in the year. The move to focusing on storage numbers was made as production continued to climb despite a rapidly falling rig count. The decline in rig count is likely to eventually hit US production, but numbers have continued to surprise to the upside as operators focused on the best portions of their acreage.
Speculation has swirled around rather the US will test the limits of its storage capacity. Inventories at Cushing now stand at nearly 50 MMbbl, or 70% of the hub's full capacity. Analysts predict that storage may become tight in May if inventories continue to build at the current 8-10 MMbbl per week clip. In that scenario, crude could see another sharp leg down as production is unloaded at steep discounts.
Despite the negative supply fundamentals, bullish speculation is pushing WTI back towards the $50/bbl mark. Equity shares of energy companies took note and were one of the few bright spots in an otherwise poor showing for the markets on Wednesday. Chevron (NYSE: CVX) rose by 1.41%, while ExxonMobil (NYSE: XOM) notched a more modest 0.40% gain. Shale leaders EOG (NYSE: EOG) and Pioneer Natural Resources (NYSE: PXD) recorded gains of 1.26% and 2.56% respectively.
The storage report numbers from the EIA are a reminder to investors that oil markets remain fundamentally oversupplied and there is potential for another leg downward if crude storage capacity begins to run out. The near-term outlook for oil price takers including upstream companies and oilfield services remains bearish despite intermittent rallies in crude driven by the strength of the dollar or geopolitical concerns. Investors should continue to exercise caution about buying into rallies.
Disclosure: The author is long CVX, EOG, PXD.
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