Oil Hits 1-Month Low as Traders Zoom in on Crude Build

© Reuters.

By Barani Krishnan

Investing.com - It isn't easy to deflect attention from a 10-million-barrel crude inventory build, however hard oil bulls may try.

U.S. crude futures tumbled as much as 4% on Thursday, hitting one-month lows, as those long the market struggled to explain the previous day's dataset from the U.S. Energy Information Administration. The EIA reported a totally unexpected crude stockpile build of 9.9 million barrels for the week ended April 26. The market had expected a rise of only 1.5 million barrels.

West Texas Intermediate futures, the benchmark for U.S. crude, eventually settled down $1.81, or 2.8%, at $61.81 per barrel. It tumbled earlier to $60.95, its lowest level since April 1.

London Brent futures, the global benchmark for oil, was down $1.43, or 2%, at $70.75, breaking key $70 support earlier with a session low at $69.69.

Notwithstanding Thursday's declines, WTI remained up 36% on the year while Brent showed a gain of more than 31%. And the U.S. average price of gasoline rose to $2.888 a gallon from $2.882 on Wednesday, AAA's Daily Fuel Gauge Report said.

The plunge came despite geopolitical tensions that should be supportive to oil. These include U.S. attempts to choke Iranian oil off the market with the end of sanction waivers granted by Washington to buyers of Tehran's crude and unrest in Venezuela, where incumbent President Nicholas Maduro was being challenged by U.S.-backed opposition leader Juan Guaido.

Phil Flynn, an analyst at The Price Futures Group in Chicago, who's typically bullish on oil, said questions were being asked "on whether the massive crude oil supply increase is due to the continuing fallout from Houston Ship Channel closures or ... a sign that demand is faltering."

"Or is it just more shale oil?" he wrote in his daily note.

Wednesday's EIA data came on the backdrop of lower refining activity, a rise in crude imports into the U.S. and new highs in domestic production.

EIA data shows that crude inventories are up nearly 30 million barrels in the last five weeks, with 500,000 barrels of that coming from releases made from the government's Strategic Petroleum Reserve. Crude stocks have been building since a chemical plant fire at the Houston Ship Channel in early March, which some say was still disrupting oil flows due to ongoing remedy works.

Flynn says much of the build over the past five weeks may just be oil destined for export but unable to leave the Houston port.

If those volumes were cleared, it would be bullish for oil, Flynn said.

For evidence, he cited a Reuters report that volumes at Enterprise Products Partners' crude marine terminals in Houston jumped to a record of nearly 900,000 barrels per day in the first quarter after disruptions on the channel. Enterprise's crude volumes from the Permian basin, the largest U.S. oilfield, was also expected to increase by about 700,000 bpd in 2019 from rising export demand.

Oil bears pointed instead to deeper underlying problems with crude demand.

"This is one of those days that gives me comfort (as) I roll my eyes when people are bullish on the flat price (of oil) because 'physical (demand) is (supposedly) strong'," said Scott Shelton, energy futures broker at ICAP (LON:NXGN) in Durham, N.C.

"Oil in this decade of trading is more about following the money rather than following the physical market," Shelton added. "The current market was driven by momentum-based CTA buying with shorts now at 5-year lows across the energy markets and the momentum is gone, leaving a market that is willing to buy spreads, but not willing to buy flat price."

Wednesday's EIA data had surprises as well on the gasoline and distillates sides.

The EIA said gasoline inventories rose by 0.9 million barrels, compared with expectations for a draw of 1 million barrels. Distillate stockpiles dropped by 1.3 million barrels, compared to forecasts for a decline of 193,000 barrels.

The EIA said refineries operated at 89.2% of their operable capacity last week, versus last week's 90.1%. Refiners have been cutting back on activity either due to maintenance or reduced profit margins lately in processing crude.