Oil trading has become volatile as prices face headwinds from increasing inventories that appear to be climbing. The recent addition of active oil rigs reported by Baker Hughes over the past few weeks is likely a precursor to further increases in production and potentially inventory builds.
Crude oil prices consolidated on Wednesday following a report from the Department of Energy which revealed this week’s inventory numbers. Prices have been on the defensive and have declined nearly 20% since the beginning of July. While gasoline demand remains robust through the heart of the driving season, distillate demand is down year over year. A fear traders have is that declining distillate demand will lead to a glut of heating oil ahead of the winter.
The increase in imports were a major factor in the build in crude oil inventories reported this week. Production in the U.S. declined, with the entire focus on the drop in Alaska by 55K barrels compared to zero on the continental US. According to the Energy Information Administration, U.S. crude oil imports averaged over 8.7 million barrels per day last week, up by 301,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.3 million barrels per day, 10.4% above the same four-week period last year.
Additionally, stocks actually declined in Cushing which is generally a bullish sign for WTI crude oil, but the headline number was not kind to the petroleum complex. The EIA reported that U.S. commercial crude oil inventories increased by 1.4 million barrels from the previous week. Expectations were for a decline in inventories of approximately 2 million barrels. In fact, on Tuesday, the American Petroleum Institute reported that it estimated that crude oil inventoried declined by 1.4 million barrels in the latest week. This head fake, might have caught some traders off-guard.
The Department of Energy also reported that gasoline inventories decreased by 3.3 million barrels last week, but despite this change inventories are well above the upper limit of the average range. Distillate fuel inventories increased by 1.2 million barrels last week and are above the upper limit of the average range for this time of year.
Demand remains solid. The EIA reported that total product demand over the last four-week period averaged about 20.5 million barrels per day, up by 0.6% from the same period last year. Over the last four weeks, gasoline demand averaged about 9.8 million barrels per day, up by 2.2% from the same period last year. Distillate fuel demand on the other hand averaged over 3.6 million barrels per day over the last four weeks, down by 1.9% from the same period last year.
The technicals remain negative for crude oil prices. The 20-day moving average is poised to cross below the 200-day moving average which shows that a long term down trend is in place. Momentum remains negative but the RSI (relative strength index) has stabilized and moved slightly above the oversold trigger level of 30 which could foreshadow a correction.