Oil down 6% in biggest loss in a year; Gasoline build hijacks OPEC show

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Investing.com - The oil trade seems to have woken up to the fact that there’s something bigger after all than OPEC: The economy.

Crude prices fell almost 6% on Wednesday for the biggest one-day sell-off since September 2022. The plunge came after a rally that began in June, founded more on OPEC production maneuvers designed to create maximum fear about short supply than demand sustained by global economic soundness. Crude prices ultimately rose almost 30% for the third quarter.

On Wednesday, the floor under that rally gave way like it hadn’t before in those three months.

New York-traded West Texas Intermediate, or WTI, crude for delivery in November traded settled down $5.01, or 5.6%, at $84.22 per barrel. The US crude benchmark hit a one-month low of $84.17 earlier and was down 7% on the week.

“If WTI at $84 doesn’t attract buyers, the decline can extend to $81,” said Sunil Kumar Dixit, chief technical strategist at SKCharting.com. 

As WTI settled, London-traded Brent for the most-active December contract was down $5.11, or 5.6%, to $85.91 by 14:30 ET (18:30 GMT), after a one-month low at $85.77. The global crude benchmark was down 10% on the week. 

Wednesday’s collapse in oil prices came amid several drivers. 

The primary one was concern about the health of the global economy, particularly Europe’s most vulnerable versus the relatively resilient US economy.  

But the United States has its own problems too with the energy-price driven inflation of the past three months prodding the Federal Reserve to stay hawkish on interest rates for the foreseeable future. That has pushed the dollar to 11-month highs, further weakening the finances of other nations and international demand for crude and other commodities denominated in the US currency.

OPEC show "hijacked" by economy, US inventory data

The other driver for Wednesday’s spectacular price drop in crude was the seasonal slide in U.S. demand — a fact that seemed lost on those betting on the oil rally of the past quarter to continue indefinitely on OPEC market manipulation and promises.

“Today’s oil prices, if anything, show how insanely bulls have been pushing this market up for months, oblivious to the fact that there’s something greater than OPEC — the economy, you know,” said John Kilduff, partner at New York energy hedge fund Again Capital.

OPEC and its allies at a meeting on Wednesday reaffirmed the joint Saudi-Russian pledge to continue removing a total of at least 1.3 million barrels a day from the daily production of the two countries until the end of the year. 

The so-called OPEC+ alliance — made up of the 13-member Saudi-led Organization of the Petroleum Exporting Countries and the 10 independent oil producers aligned to Russia — however, saw its much-hyped show hijacked by the events in global markets and by an inventory report released by the U.S. government.

US stockpiles of gasoline jumped almost 6.5 million barrels last week, the biggest build in nearly two years, a government report showed on Wednesday, as refiners optimized processing of oil to capitalize on still-good profit margins despite waning seasonal demand for fuels. 

Inventories of crude oil, meanwhile, fell by just a third during the week ended Sept 29 -- amid the first rise in two months in volumes at the Cushing, Oklahoma hub that serves as a central delivery and storage point for U.S. crude, according to the Weekly Petroleum Status Report of the U.S. Energy Information Administration, or EIA.

Crude inventories overall fell by 2.224M barrels last week, registering a third straight week of draws that kept up with the prior week’s drop of 2.17M. Analysts tracked by Investing.com, on the other hand, did not really expect a change in overall crude inventories last week, forecasting a negligible build of 0.05M.

Despite the draw reported for the headline crude number by the EIA, crude volumes at Cushing rose last week for the first time in eight weeks, showing a modest gain of 0.132M versus the previous week’s slide of 0.943M. 

The build at Cushing is significant for several reasons. For weeks now, traders had been fearful that Cushing inventories would fall to critically low levels that would complicate operations at the storage hub. The hub had seen enormous outflows of crude this year versus inflows, partly because of the pickup in export demand for a heavier type of US crude called West Texas Intermediate Midland, which people in the trade say is somewhat comparable to the viscosity of Saudi and Russian oils. 

Shipments of US crude reached record highs of more than 5 million barrels per day in recent weeks, boosted by demand for the so-called WTI Midland which made inroads into markets underserved by production cuts in Saudi and Russian crude. Last week, for instance, US crude exports were at 4.96M barrels, up from the prior week’s 4.012M.

The build in Cushing despite such high demand for US crude proved there were finally more inflows at the hub than outflows despite the number of actively-deployed domestic oil drilling rigs falling almost non-stop since the start of this year. Despite the drop in oil rigs, the EIA continued to project a daily production of 12.9M barrels for US crude last week.

But more than the overall US crude draw and the build at Cushing, the staggering number in the latest weekly EIA inventory report was the build for gasoline stockpiles, which went up by 6.481M barrels last week, adding to the prior week’s growth of 1.027M. It was the single largest weekly build in gasoline since January 2022. Analysts tracked by Investing.com had anticipated a drop of 0.3M barrels instead last week for gasoline, America’s foremost fuel product..

While gasoline inventories rose, stockpiles of distillate — a feedstock for diesel and heating fuel — fell by 1.269M barrels last week, after a build of 0.398M in the week prior. Analysts tracked by Investing.com had forecast a 0.068M drop for last week.

The changes in gasoline and distillate inventories came amid healthy refining profit margins, known as “cracks”, seen for both now, particularly in distillates.

Typically at this time of year, demand for fuels is softer in the United States as fewer families do trip roads with children back in school or college. Yet, refiners seem to be cranking out as much gasoline and diesel as they could, incentivized by the cracks. The EIA said last week's total refined oil product supply to the marketplace -- an indicator of demand -- fell to 8.014M for gasoline versus the prior week's 8.619M.

The EIA said refiners actually turned out less gasoline and other fuel products last week compared with the week prior. Still, they seem to be processing more oil than necessary at this time of the year, prompted by the cracks.

“To give an idea of what cracks are worth now, the one for New York ULSD which is representative of diesel, is at around $45 a barrel prompt,” said Kilduff of Again Capital. “Just over a decade ago, we used to have cracks in the single digits and sometimes even in the negative.”