Why Oil Prices Keep Rising When Supplies Are at Record Highs?

US oil prices rose Wednesday to a new three-month high as the market focused on the Fed's cautious outlook and a falling dollar, shaking off a surprisingly large increase in crude stocks that brought it to record levels.

The commodity in particular has been pledged by Jerome Powell, Fed chairman, to keep interest rates close to zero by 2022 to support the world's largest economy. While this eased concerns about energy demand, it also depressed the dollar, which was positive for oil. A weaker greenback usually makes oil more attractive as it is denominated in dollars.

On the New York Mercantile Exchange, WTI crude rose 66 cents, or 1.7%, to $ 39.60 a barrel in July, the highest settlement since March 6.

Analysis of the latest EIA report

Below we review the weekly UVP Petroleum Status Report for the week ending June 5th.

Crude Oil: The Federal Government's EIA report found that crude oil inventories rose by 5.7 million barrels, compared to expectations of an increase of 3.2 million barrels. A sharp increase in imports from Saudi Arabia and a drop in exports to a seven-month low led to the surprising increase in inventories among the world's largest oil consumer. This brings total domestic inventories to 538.1 million barrels - the highest in existence, 10.8% above the previous year and 14% above the five-year average.

Meanwhile, oil prices were based on inventory at the Cushing terminal in Oklahoma. As the central delivery hub for US crude oil futures traded on the New York Mercantile Exchange, inventories decreased by 2.3 million barrels to 49.4 million barrels.

Crude oil supplies declined from 41.3 days in the previous week to 40.9 days. In the same period of the previous year, coverage was 28.8 days.

Let us now turn to the products.

Gasoline: Gasoline reserves rose for the third time in four weeks. The 866,000 barrels of fuel are due to higher production, although demand continues to recover from the unprecedented pathway associated with the corona virus. Analysts had forecast an increase of 300,000 barrels. At 258.7 million barrels, the current stock of the most commonly used oil product is 10.1% above the previous year's level and 11% above the five-year average.

Distillate: Distillate fuel supply (including diesel and heating oil) increased for a tenth consecutive week. The 1.6 million barrel increase reflected rising production and imports, which more than offset demand gains. In the meantime, the market had been looking to build a supply of 1.5 million barrels. At 175.8 million barrels, the current supply is at its highest level since 2010, 36.9% above the previous year's level and 29% above the five-year average.

Refining rates: Refinery utilization rose 1.3% year over year to 73.1%.

Conclusion

The increase in crude oil stocks surprised the market, which expected a decline due to easing measures. Inventories are now at the highest weekly level ever, surpassing the all-time high of 535.5 million barrels for the week ending March 31, 2017.

On a positive note, the oil continued to decline at the Cushing storage node. The report also supported the reduction in business by US manufacturers. Weekly figures show that production has dropped to 11.1 million barrels a day since reaching 13.1 million in the second week of March.

In particular, the volume from the U.S. catchment area number one - Permian - will decrease by 87,000 barrels a day to 4.3 million barrels a day in June - the second month of the decline - as at Diamondback Energy FANG, Cimarex Energy XEC, Concho Resources CXO, Pioneer Natural Resources PXD and others are investing much less money in the unconventional game in 2020.

Regardless of the bullish data in the report, investors are still concerned about the supply flood. Overall, US commercial inventories have increased more than 19% since March, while domestic fuel demand, although improving, remains weak. A further increase in gasoline and distillate stocks in the last report worried dealers.

Here too, despite renewed increases in refining runs, US capacity utilization is not too far from its lowest level ever. Downstream operators such as Valero Energy VLO, Marathon Petroleum MPC and Phillips 66 PSX, all of which have a Zacks 3rd (hold) rating, have dramatically reduced processing capacity to deal with the erosion of demand caused by efforts to curb the spread of the corona virus becomes.

The full list of today's Zacks # 1 Rank (Strong Buy) stocks can be found here.

As evidence of the destruction in demand, the EIA estimates that U.S. oil consumption will decrease by 2.4 million barrels a day to 18.06 million barrels a day in 2020.

While the expansion of OPEC + production cuts has most likely managed to cut prices, serious questions remain about the future direction of the oil.

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