Oil Up For 3rd Day: Can It Recover From Coronavirus Swings?

Oil prices rose on Wednesday after the U.S. Senate approved a $2 trillion emergency stimulus to cope with the economic fallout of the coronavirus pandemic. WTI futures rose by 48 cents, or 2%, to $24.49 a barrel, up for a third session. This followed a forgettable last week for the commodity wherein it tumbled 29% - the biggest since the 1991 Gulf War.

Oil Hit by Double Whammy

Despite the bounce off, there is no denying that oil fundamentals remain firmly bearish. Last week, WTI reached its lowest settlement since February 2002 at $20.37 a barrel, having slumped almost 67% since the beginning of this year.

The fast-spreading novel coronavirus outbreak has triggered an unprecedented selloff in the commodity. In particular, with major cities under lock-down and travel restrictions in place, the consumption for crude is set to drop substantially. Global efforts to combat the pandemic’s impact and rev up economic activity have largely failed so far. The virus-inflicted demand slowdown has led to hefty oil selloff.

Pressure in the oil markets has been exacerbated by the no-holds-barred price war between Saudi Arabia and Russia. The carnage deepened after Saudi Arabia (the OPEC cartel’s biggest producer and exporter) and Russia (leader of the non-OPEC contingent) failed to agree on additional production cuts to boost oil market fundamentals and prop up prices. Subsequently, both countries decided to open the production floodgates, which combined with the demand destruction to send prices into a tailspin.

The carnage sent most energy companies scurrying for cover. Even the so-called supermajors like Chevron (NYSE:CVX) and Royal Dutch Shell (LON:RDSa) RDS.A – both carrying a Zacks Rank #5 (Strong Sell) – don’t seem to be immune to this price crash and were forced to suspend their share buyback plans. U.S. shale producers have been the biggest casualties, with the likes of Diamondback Energy (NASDAQ:FANG) , Concho Resources (NYSE:CXO) , Parsley Energy (NYSE:PE) , among others, lowering their 2020 capital expenditure target to contend with depleted oil prices. Some E&P operators like Apache (NYSE:APA) and Occidental (NYSE:OXY) slashed their dividend payouts.

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The latest figures from the EIA, which point to an oversupplied oil market, has added to the turmoil.

Analyzing the Latest EIA Report

The U.S. Energy Department's latest inventory release revealed a ninth straight weekly increase in stockpiles though the build was lower than expected. Meanwhile, lower refined product inventories – gasoline and distillate – were also part of the picture.

Below we review the EIA's Weekly Petroleum Status Report for the week ending Mar 20.

Crude Oil: The federal government’s EIA report revealed that crude inventories rose by 1.6 million barrels, compared to the 2.5 million barrels increase that energy analysts had expected. Lower exports primarily drove the stockpile build with the world's biggest oil consumer even as U.S. crude production retreated from record levels. This puts the total domestic stocks at 455.4 million barrels – 3% above the year-ago figure but 3% lower than the five-year average.

The latest report also showed that supplies at the Cushing terminal in Oklahoma (the key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange) was up 858,000 barrels to 39.3 million barrels.

The crude supply cover was up from 28.7 days in the previous week to 28.9 days. In the year-ago period, the supply cover was 27.6 days.

Let’s turn to products now.

Gasoline: Gasoline supplies tallied an eighth straight drop. The fuel’s 1.5 million barrels decline is attributable to lower production. Analysts had forecast 2.4 million barrels draw. At 239.3 million barrels, the current stock of the most widely used petroleum product is essentially in-line with the year-earlier level and is in the vicinity of the five-year average range.

While the EIA reported another strong drawdown in gasoline stocks, market watchers believe that the official data hardly reflects the current realities of the oil market. Independent analysts say that motor fuel demand is set to take a severe hit as coronavirus forces more people to work remotely and observe social distancing. In fact, gasoline futures recently dropped to their lowest on record, while demand fell 859,000 barrels per day to a seven-week low.

Distillate: Distillate fuel supplies (including diesel and heating oil) were down for a tenth consecutive week. The 678,000 barrels decrease could be attributed to dip in imports. Meanwhile, the market had been looking for a supply draw of 1.6 million barrels. Current supplies – at 124.4 million barrels – are 4.5% lower than the year-ago level and remain 11% below the five-year average.

Refinery Rates: Refinery utilization was up 0.9% from the prior week to 87.3%.

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