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U.S. Crude Slumps as Production Tops 10 Million Barrels


The U.S. Energy Department's inventory release showed that crude stockpiles recorded a second straight weekly build. On a further bearish note, gasoline and distillate inventories rose, too.

However, the talking point from the data sets was the steady trend of rising domestic oil production that continues to be the biggest headwind for the market. EIA revealed that weekly U.S. crude output jumped above 10 million barrels a day for the first time since 1970. This has refueled concerns that the domestic supply glut is cancelling out cuts from OPEC and its allies.

As a result, the front month West Texas Intermediate (WTI) crude futures moved down 2.5% (or $1.6) to end at $61.79 per barrel yesterday – the lowest settlement since Jan 8.

Investors Dump Energy Stocks

The federal data sparked widespread selling in energy stocks, which pushed the Energy Select Sector SPDR – an assortment of the largest U.S. energy companies – down almost 1.7% Wednesday.

The two energy representatives in the 30-stock Dow Jones industrial average, ExxonMobil Corp. XOM and Chevron Corp. CVX lost 1.8% and 1.6%, respectively, yesterday. Meanwhile, some of the biggest casualties of the S&P 500 were oil and oil-related stocks like Southwestern Energy Co. SWN, Chesapeake Energy Corp. CHK, Marathon Oil Corp. MRO and Diamond Offshore Drilling, Inc. DO.

Analysis of the EIA Data

Crude Oil: The federal government’s EIA report revealed that crude inventories rose by 1.9 million barrels for the week ending Feb 2, following an increase of 6.8 million barrels in the previous week. The analysts surveyed by S&P Global Platts – the leading independent commodities and energy data provider – had expected crude stocks to go up some 2.8 million barrels.

Record high domestic production led to the stockpile build with the world's biggest oil consumer. This was partly offset by lower imports and higher refiner demand, which helped restrict the inventory injection below expectations.

In particular, U.S. output rose by 332,000 barrels per day last week to more than 10.2 million barrels per day – the most since the EIA started maintaining weekly data in 1983 and the first time in nearly 50 years that oil production broke through the 10 million barrels a day threshold.

While oil inventories rose for a second successive week, stockpiles have shrunk in 34 of the last 44 weeks and are down more than 110 million barrels since April. The gradual fall has helped the U.S. crude market shift from year-over-year storage surplus to a deficit. At 420.3 million barrels, current crude supplies are 17.4% below the year-ago period though they are in the middle of the average range during this time of the year.

Meanwhile, stocks at the Cushing terminal in Oklahoma – the key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange – was down by 711,000 barrels to three-year lows of 36.3 million barrels.

The crude supply cover was up from 25.1 days in the previous week to 25.4 days. In the year-ago period, the supply cover was 31.6 days.

Gasoline: Gasoline supplies recorded their twelfth increase in 13 weeks on the strength of production and imports. The 3.4 million barrels addition – significantly above the polled number of 200,000 barrels rise in supply level – took gasoline stockpiles up to 245.5 million barrels. Despite last week’s increase, the stock of the most widely used petroleum product remains 4.2% below the year-earlier level and is in the middle of the average range.

Distillate: Distillate fuel supplies (including diesel and heating oil) gained 3.9 million barrels last week, contrary to analysts’ expectations for 800,000 barrels decrease in supply level. The weekly rise could be attributed to tepid demand and strong production. But at 141.8 million barrels, current supplies are still 16.9% below the year-ago level and are in the middle of the average range for this time of the year.

Refinery Rates: Refinery utilization was up by 4.4% from the prior week to 92.5%.

About the Weekly Petroleum Status Report

The Energy Information Administration (EIA) Petroleum Status Report, containing data of the previous week ending Friday, outlines information regarding the weekly change in petroleum inventories held and produced by the U.S., both locally and abroad.

The report provides an overview of the level of reserves and their movements, thereby helping investors understand the demand/supply dynamics of petroleum products. It is an indicator of current oil prices and volatility that affect the businesses of the companies engaged in the oil and refining industry.

The data from EIA generally acts as a catalyst for crude prices and affect producers, such as ExxonMobil Corp. XOM, Chevron Corp. CVX and ConocoPhillips COP, and refiners such as Valero Energy Corp. VLO, Phillips 66 (PSX) and Marathon Petroleum Corp. MPC.

Want to Own an Energy Stock Now?

If you are looking for a near-term energy play, Occidental Petroleum Corporation OXY may be a good selection. This company has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Based in Houston, TX, Occidental is an integrated oil and gas company, with significant exploration and production exposure. The 2017 Zacks Consensus Estimate for this company is 89 cents, representing some 188.1% earnings per share growth over 2016. This year’s average forecast is $2.47, pointing to another 177.5% growth.

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