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U.S. oil data shocks the market in more ways than one

An unexpected climb in U.S. crude inventories wasn’t the only
shock factor in the Energy Information Administration’s weekly
report released Wednesday.

Stockpiles of gasoline and distillates also climbed last week
despite a decline in refinery activity, as demand for the
petroleum products took a significant hit.

Gasoline supplies rose by 3.3 million barrels for the week
ended June 2, while distillates, which include heating oil,
jumped by 4.4 million barrels, according to the EIA. Analysts surveyed
by S&P Global Platts were looking for a rise of 250,000
barrels for gasoline, with inventories of distillates expected
to be unchanged.

“Refiners and marketers can’t be that shocked to see a
post-memorial Day demand slump,” said Tom Kloza, global head of
energy analysis at the Oil Price Information Service. “Most
years see a brisk beginning to the driving season but demand
then tends to lag until all schools have let out.”

However, the report from the EIA showed a “stunning” 1.418
million barrel-per-day drop in demand last week across all
petroleum products, said Kloza.

The EIA report pegged total product demand at 19.340 million
barrels a day. That included a drop of 505,000 barrels a day
for gasoline demand and 520,000 barrels a day for distillate
demand from a week earlier.

‘A 1.4 million barrel-per-day petroleum-demand drop is the kind
of shift one associates with a catastrophic storm or economic
plunge.’

Tom Kloza, OPIS

“A 1.4 million barrel-per-day petroleum-demand drop is the kind
of shift one associates with a catastrophic storm or economic
plunge,” Kloza said.

“The two-week record for gas demand has now given way to a
four-week average that puts consumption about 0.7% below last
year,” he added.

‘Plentiful’ supplies

The U.S. government agency also reported an unexpected climb of
3.3 million barrels in domestic crude inventories. That
contradicted the drop of 4.6 million barrels for the week
reported by the American Petroleum Institute late
Tuesday
—and was in contrast to the fall of 3.5 million
barrels expected by analysts polled by S&P Global Platts.

“The market was geared up for a bid crude-oil draw and got
blindsided,” said Phil Flynn, senior market analyst at Price
Futures Group.

Even more shocking, the rise for crude inventories came despite
a decline in domestic production and the “biggest weekly drop
in Saudi imports ever,” according to Flynn.

EIA data show that U.S. imports of oil from Saudi
Arabia
sank from 1.362 million barrels a day to 615,000
barrels a day last week from a week earlier.

“Crude, gasoline and distillates inventories are all at or
above the top of their five-year ranges,” said Matt Smith,
director of commodity research at ClipperData. “Supply remains
plentiful.”

Not surprisingly, West Texas Intermediate crude prices on the
New York Mercantile Exchange

CLN7,
-4.79%

 dropped to their lowest levels in a
month
. Gasoline

RBN7,
-3.71%

 and heating oil

HON7,
-2.95%

 futures also fell sharply, back down to early
May levels.

The rise in inventories of petroleum products came even as
refinery capacity utilization fell to 94.1% from 95% a week
earlier. Less refinery activity points to less product
production, but demand weakness more than offset that.

“This contra-seasonal data point is net negative for refined
product and raw crude futures prices, and likely foreshadows a
difficult August as refinery utilization rolls off without a
material drawdown in refined products across OECD markets,”
said Chris Kettenmann, chief energy strategist at Macro Risk
Advisors, in a note.

Kettenmann pointed out that while crude production in the lower
48 states fell by 20,000 barrels last week, he remains
concerned that the “window for net draws in the U.S. in the
2017 fiscal year is “too narrow for total inventories to
normalize.” as U.S. shale producers continue to “demonstrate
robust growth” with WTI oil prices trading around $48 to $50 a
barrel.

In a monthly report issued Tuesday, the EIA
said it expects U.S. crude production in 2018 to average 10
million barrels a day. That would top the previous annual record of 9.6
million barrels a day in 1970.

Read: Why global oil production looks set to grow
in 2018, despite OPEC—led output cut

Gasoline prices

Kloza, meanwhile, was upbeat about the outlook for gasoline
demand this summer.

“With gasoline prices pretty much exactly where they were a
year ago, and with full employment, we’ll see very strong
demand in the driving season,” he said. “The problem comes
after Labor Day when there is no real catalyst to drive demand
higher.”

All told, at least for now, the news is good for consumers.

In the first quarter of this year, U.S. consumers regularly
paid 50 cents to 55 cents a gallon more for gasoline than what
they paid last year, said Kloza.

But as early as this week, they may see national average
gasoline prices below what they paid a year ago, he said. That
would mark the first such decline since November.

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