A shocking 9.9 million barrel draw in total U.S. crude oil caused prices to increase

Recap:  WTI posted another 3-year high, with the August contract trading above $73.00 a barrel for the first time since July 2015, while August Brent peaked the session at $78.17, as it sets up for its highest finish since May. Prices were dragged higher by the shocking 9.9 million barrel draw in total U.S. crude oil stocks, which included a 2.7 million barrel draw in stockpiles held at Cushing, OK, the NYMEX delivery point. Gains were pared prior to the settlement period, with August WTI closing at $72.76 a barrel, up $2.23, or 3.2%. Brent for August delivery tacked on $1.31, or 1.72%, to settle at $77.62 a barrel.  

The discount on Brent/WTI spread, which has been taking a hit, was further impacted on Wednesday due to the 2.7 million barrel draw in U.S. crude oil stocks held at Cushing, OK. This spread narrowed to as tight as -$4.18, before settling at -$4.86. The Syncrude outage in Canada has had a significant impact on the spread between Western Canadian Select and WTI. This spread was trading at -$24.00 on Friday, and as of late Tuesday, this spread was trading at -$20.00. As of the time of this writing, there was now information for Wednesday’s trading, however, given the strength in WTI, we would believe that the discount on this spread narrowed further.

July gasoline rose by 2.8%, to settle at $2.134 a gallon, while July heating oil rose 2.3%, to $2.177 a gallon.

Fundamental News:  An Iranian oil official said cutting Iran’s oil from the global market could not take place easily and in a few months as demanded by the US.  He said Iran exports a total amount of 2.5 million bpd of crude and condensate and eliminating it easily and in a period of a few months is impossible.  On Tuesday, the US State Department called on all countries to stop imports of Iranian oil starting in November. 

While OPEC is heeding to consumers’ calls to produce more oil, its supply buffer is declining.  A managing director at Goldman Sachs stated that the reduction in spare capacity by OPEC leaves pricing risk more exposed to the upside.  According to the IEA, idle oil fields that OPEC and its allies can deploy in emergencies have a total capacity of about 3.4 million bpd.  Those reserves are expected to fall as the group implements the 1 million bpd supply increase pledged in Vienna last week.  Saudi Arabia’s plan to increase its output to a record 10.8 million bpd in July would use up about 40% of its idle capacity, leaving the world with a buffer equivalent to just 2.6% of global supply.  This would limit OPEC’s ability to react to further disruptions.  Venezuela’s output is expected to fall further as its economic crisis worsens while Libya, earlier this month, unexpectedly lost 400,000 bpd of production due to an attack on two of its oil terminals.  Also, the US’ push for US allies to completely stop importing Iranian crude by November could take another 1.5 million bpd from the market. 

Russia’s oil output reached 11.054 million bpd so far in June, up from an average 10.97 million bpd in March to May period.  This is up from the Russian quota of 10.947 million bpd under a global deal aimed at cutting oil production. 

Goldman Sachs’ investment management division recommended its clients to be long oil as it expects crude prices to increase. 

Bloomberg reported that crude imports to the US Gulf Coast fell by 202,000 bpd to 2.93 million bpd in the week ending June 22nd. 

IIR Energy reported that US oil refiners are expected to shut in 138,000 bpd of capacity in the week ending June 29th, cutting available refining capacity by 28,000 bpd from the previous week.  IIR expects offline capacity to increase to 184,000 bpd in the week ending July 6th. 


Early Market Call – as of 8:50 AM EDT

WTI – Aug $72.49, down 28 cents

RBOB – July $2.1239, down 97 points

HO – July $2.1749, , down 23 points

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