It looked like a tidal wave of oil had crashed ashore when the EIA inventory numbers were released for last week. Crude inventories rose by a whopping 9.4 million barrels crushing expectations for a 0.8 million barrel build. Gasoline inventories fell sharply by 6.2 million barrels far surpassing estimates of a 2.7 million barrel decline. Distillates were nearly unchanged at +0.5 MB. Refinery utilization fell to 85.7% and domestic crude demand dropped sharply.
You would have thought that would have been a very bearish inventory report. Crude inventories rose at the fastest rate since March 2001. If you have been reading this commentary every day you know this spike in imports of 1.3 mbpd to average 11.0 mbpd for the week should not have been a surprise. When tropical storm Edouard was stirring up trouble two weeks ago all the tankers bound for the gulf went into a holding pattern until Edouard moved out of range. This week of delays meant there was a week where imports were well below average. That average caught up as those tankers lined up at the docks to unload their crude.
The decline in refinery utilization and the drop in crude demand also helped to bolster the rise in inventory levels. Oil demand in the U.S. is -4% below the same period in 2007. Crude inventories are -7.1% below 2007 levels. With tropical storm Fay clogging the entry into the gulf for the last six days we are going to see the same drop in imports next week and a bounce the week after. Timing of the shipments is always questionable so the impact could be a week later depending on where the tankers were heading.
Fay has reversed course and is heading back to the northwest across Florida and could reenter the gulf on Thursday evening. This storm is causing forecasters lots of grief as they try to predict Fay's path.
Crude futures for September expired for trading at the close on Wednesday and it was a volatile day. With the inventory report and expiration on the same day the price of crude varied from $117.25 at 10:30 to $112.60 at 11:15. Prices rebounded from that dip on short covering and rotation into the October contract and crude is holding at $117 again at 2:AM on Thursday morning. The dollar was also weaker and that has an impact on any commodity price including oil.
Chatter about the coming OPEC meeting on September 9th is also supporting prices. Several OPEC countries have commented on the need to cut production because the market is well supplied. That is their catch phrase but they always forget to mention that only the sour crude market is well supplied and the light sweet crude market is always in short supply. That is the contract the world follows for price. Analysts are not expecting an outright production cut but the organization is expected to reinforce the existing quotas. You may remember Saudi Arabia is producing far in excess of their quotas in an effort to slow the rise in crude prices. If they were forced to return to their quota it would be the equivalent of a production cut.