Surfeit of Oil

July 29th, 2016 6:21 am | by John Jansen |

Via WSJ:
By Sarah McFarlane and
Jenny W. Hsu
July 29, 2016 5:31 a.m. ET

Oil prices extended their recent slide on Friday, as a deluge of oil and refined products in the market weighed heavily, keeping prices near three-month lows.

Brent crude, the global oil benchmark, fell 1.2% to $42.71 a barrel on London’s ICE Futures exchange. On the New York Mercantile Exchange, West Texas Intermediate futures were trading down 1% at $40.74 a barrel.

A combination of an expanding global gasoline glut, early signs of increasing production in the U.S., and rising output from the Organization of the Petroleum Exporting Countries have dragged down oil prices by around 20% since they broke above $50 in June.

“The unexpectedly weak performance raises the important question of whether this is a short-lived blip or has the fragile recovery in oil prices been derailed,” said brokerage PVM in a note.

The market was caught off-guard by an unexpected rise in weekly U.S. gasoline stocks which showed inventories rose 452,000 barrels to hit 241.5 million barrels in the week ended July 22. The increase comes at a time when stocks are usually being drawn.

“Global (gasoline) stocks should usually peak just before the start of the driving season,” said Patrick Kulsen, analyst at Dutch consultancy PJK International. “The expectation was that there would be more consumption in the U.S. and apparently those expectations were exaggerated.”

Support from temporary factors including Canadian wildfires, oil workers on strike in Kuwait and militant attacks in Nigeria that helped oil prices recover since February have now dissipated and the focus has reverted to the overhang of supply.

Investors will also be watching the weekly U.S. drilling report released later today for cues. Data from industry group Baker Hughes Inc. have shown an increase in oil drilling activities in the U.S. for four consecutive weeks to 371 as of July 22.

“In addition to having more rigs drilling, the average productivity of rigs continues to increase,” said the U.S. Energy Information Administration. In the three major oil producing regions of Bakken, Eagle Ford, and Permian, daily productivity picked up by 155 barrels, 226 barrels and 111 barrels, respectively, per well, over the 2015 average.

In June, OPEC crude production increased by 264,000 barrels a day to average 32.86 million barrels, according to the cartel’s monthly report.

The increased barrels come at a time when the refined market is becoming bloated as output outstrips demand. The fear is that the glut of fuels will erode appetite for crude in the coming months and suppress prices to below the $40 mark.

Nymex reformulated gasoline blendstock—the benchmark gasoline contract—fell 1.5% to $1.28 a gallon. ICE gas oil changed hands at $367.00 a metric ton, down $6.75 from the previous settlement.

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