By Barani Krishnan
Investing.com - The U.S. government reported the biggest weekly draw of crude oil in more than 3 years, and the market’s reaction: “Meh.”
In one of the biggest positive surprises for oil bulls in months, the Energy Information Administration reported on Wednesday that crude kept in storage across the United States fell by 4.76 million barrels during the week ended Feb. 4, the most for a week since October 2018.
The drawdown was triple that projected by industry analysts and marked the second straight weekly drop in crude stocks.
That’s not at all. Gasoline stocks also had a surprise draw while those of distillates again fell more than expected.
Crude prices jumped more than $1 a barrel within a minute of the data, then retreated almost as spectacularly before settling less than one percent higher.
The market slid as much as 3% over two previous sessions, after rising about 30% in seven prior weeks.
While the mood among those long crude wasn’t necessarily gloomy, it wasn’t exuberant either — certainly not in the vein of last week where no sentiment was spared to push prices to beyond $90 a barrel.
The reason seemed clear and one that bulls in the market appeared loathe to discuss: the resumption of the Iran-West nuclear talks that has raised the specter of U.S. sanctions being removed from Tehran oil exports. It’s an eventuality that could add hundreds of thousands of barrels per day onto a market which for 18 months has been tightly controlled by the OPEC+ alliance.
To be sure, Iran is part of OPEC+. But it has been shut off from the legitimate market for exporting its oil since 2018, allowing the rest of the 26-member alliance controlled by Saudi Arabia — with Russia’s assistance — to squeeze consuming countries to pay more for the crude they need. And pay those countries have, as a barrel went from the pandemic low of negative $40 per barrel for U.S. crude to seven-year highs of $93.17 on Friday.
Iran is capable of putting anywhere between one and two million barrels per day on the market and is believed to be getting less than half of that out with black market sales that evade the U.S. sanctions.
“It’s clear why oil is unable to rally today despite this humongous drawdown in U.S. crude,” said John Kilduff, partner at Again Capital, a New York-based energy hedge fund. “The answer is Iran and talk of some Venezuelan oil likely coming back to the market as well.”
Venezuela is another country under U.S. sanctions. The Biden administration is considering a Chevron Corp (NYSE:CVX) proposal that it be allowed to accept and trade Venezuelan oil cargoes to recoup unpaid debt, people close to the discussions told Reuters this week.
New York-traded West Texas Intermediate settled up 30 cents, or 0.3%, at $89.66 per barrel. WTI lost some 2.7% in two previous sessions.
London-traded Brent, the global benchmark for oil, settled up 77 cents, or 0.9%, at $91.55 per barrel. Brent lost 2% between Friday's settlement and Tuesday's.
Notwithstanding the Iran-Venezuela situation, the EIA data put a solid demand picture under the market that had been missing from the oil rally of late.
Questions about the demand for oil had cropped up in recent weeks as EIA data showed little reductions in crude stocks and a jump instead in gasoline inventories — despite a plunge in Covid cases and hospital admissions nationwide that would have typically led to more mobility and economic activity.
“Finally, there is some correlation here between the EIA numbers and the dropping US COVID case counts,” Kilduff said, referring to the EIA data.
Gasoline inventories fell last week, drawing down by 1.64 million barrels versus projections for a 1.5-million barrel drop. Gasoline barrels had ballooned by nearly 40 million barrels during the 10 weeks to January 28.
Gasoline, known as petrol outside of the United States, is America’s premier fuel product. Inventories piled up over the past month-and-a-half as refiners appeared to be maximizing fuel processing ahead of scheduled plant maintenance in March. Escalating winter temperatures in January also typically lead to less driving among Americans.
Stockpiles of distillates, which include diesel and heating oil, fell by 929,000 barrels last week against expectations for a draw of 1.5 million and the previous week’s drop of 2.4 million, the EIA report showed. Distillates are refined into diesel for trucks, buses, trains and ships as well as fuel for jets.