Oil fell 4% on weak US crude drawdown; Brent close to at least 3 months

By Barani Krishnan

Investing.com – So much for driving season demand.

Oil prices fell 4 percent on Thursday after the weekly U.S. government data set showed a smaller-than-expected drop in crude as America’s peak summer season gets underway.

West Texas Intermediate futures, the benchmark for U.S. crude, were down $2.22, or 3.8 percent, at $56.59 a barrel.

Britain-traded August Brent futures, the global benchmark for oil, were down $2.80, or 4.1 percent, at $65.07 a barrel by 2:50 p.m. ET (18:50 GMT). Brent hit a session low of $65, the lowest level since the week ended March 3.

WTI is on track to end May down around 11%, while Brent is showing a loss of more than 10% for the month. Both are still higher for the year, with the US benchmark showing a 24% gain and its UK comparator 21%.

The US Energy Information Administration said in its regular weekly report that crude oil inventories fell by just 0.28 million barrels in the week to May 24.

That compared with forecasts for a drawdown of 0.86 million barrels after a build of 4.74 million barrels the previous week.

Lower-than-expected crude withdrawals by refiners have weighed on oil prices lately. Oil bulls typically rely on strong refinery runs and high gasoline consumption in the run-up to Memorial Day to keep prices high. But thin profit margins for gasoline production — about 25 percent lower this year compared to 2018 — have discouraged refiners from increasing output.

While the latest EIA data set showed that refinery runs rose from 89.9% of operating capacity the previous week to a seasonal norm of more than 91% last week, they were not enough to produce the drawdowns of crude oil expected by the market.

“Refineries have finally increased their rate of operation, and that could provide support for crude oil prices in the coming weeks,” said John Kilduff, founding partner at New York-based energy hedge fund Again Capital.

“Even so, it was notable that gasoline stocks were able to rise last week in the face of a second consecutive week of strong seasonal demand,” Kilduff said.

Gasoline inventories rose by 2.2 million barrels, compared with expectations for a 0.53 million barrel decline, the EIA said.

In addition, US crude output returned to a record high of 12.3 million barrels per day, offsetting the impact of ongoing OPEC production cuts.

Crude exports also rose by 400,000 barrels to 3.3 million bpd, reflecting the ability of U.S. oil carriers to increase market share as major rival producers Saudi Arabia and Russia continue to cut production to try to support prices.

The only upbeat number in the EIA data set was for distillate stocks, which include heating oil, diesel, jet fuel and other transportation fuels. They fell by 1.62 million barrels, compared with forecasts for a build of 0.56 million.

Rising trade tensions between the US and China weighed on oil gains, amid fears that the conflict between the world’s two largest economies could derail global growth and energy demand.

Ellen Wald, president of energy and geopolitics firm Transversal Consulting and a contributor to Investing.com, noted that 2019 has been good for oil traders as prices have risen steadily since the start of the year.

“However, the good news/bad news pendulum may eventually swing more to the downside as signs of a global economic slowdown become stronger,” Wald warned.

In contrast to the slowdown in demand, supply has tightened due to OPEC-led production cuts, US sanctions on Iran and Venezuela and disruptions from Nigeria to Russia.

Faced with tightening supply, Wald posits that “conflicting signals mean surprises may very well continue.”

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