Oil Gets A Lift From EIA Inventory Data, Storm Supply Risks

Oil futures rallied on Wednesday, buoyed by a significantly bigger-than-expected drop in U.S. crude supplies and concerns about production as a potential storm approaches the Gulf of Mexico (GoM).

Storm Fear Cuts GoM Output

Traders continue to keep a close eye on a tropical cyclone set to hit the U.S. Gulf Coast into the weekend. According to the EIA, the GoM is responsible for 17% of domestic crude output and 5% of natural gas output daily. The onshore Gulf Coast is also home to major refining facilities. As part of precautionary measures, operators including ExxonMobil (NYSE:XOM) , ConocoPhillips (NYSE:COP) and Anadarko Petroleum (NYSE:APC) have shut almost 32% of U.S. GoM daily crude production and nearly 18% of natural gas production from their platforms.

Analysis of the EIA Data

Crude Oil: The federal government’s EIA report revealed that crude inventories plunged by 9.5 million barrels for the week ending Jul 5, more than 4.5 times what energy analysts had expected. Strong refiner demand led to the massive stockpile draw with the world's biggest oil consumer. Last week, refinery crude runs increased by 148,000 barrels per day (bpd) to a six-month high of 17.4 million bpd.

The past week’s decline in oil inventories was the fourth in a row and comes as a relief for industry watchers who saw supplies trend mostly higher since mid-March. In fact, prior to these decreases, stockpiles expanded in 9 out of 12 weeks and were up nearly 46 million barrels (or more than 10%) during the period. As a consequence of the flurry of earlier stockpile buildups, the recent draws notwithstanding, current supplies – at 459 million barrels – remain 13.3% above the year-ago figure and 4% over the five-year average.

The latest report also showed that supplies at the Cushing terminal in Oklahoma (the key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange) was down 310,000 barrels to 52.2 million barrels.

The crude supply cover was down from 27.2 days in the previous week to 26.5 days. In the year-ago period, the supply cover was 22.9 days.

Gasoline: Gasoline supplies fell 1.5 million barrels for its fourth successive weekly decline. The drop – well above the polled number of 400,000 barrels – came on account of stronger demand for the fuel, which was up 262,000 bpd. At 229.2 million barrels, the stock of the most widely used petroleum product is now 4.1% below the year-earlier level and at the five-year average range.

Distillate: Distillate fuel supplies (including diesel and heating oil) rose 3.7 million barrels last week on lower demand, while analysts were looking for an inventory climb of around 1.5 million barrels. Current supplies – at 130.5 million barrels – are 7.2% higher than the year-ago level though stocks remain 5% below than the five-year average.

Refinery Rates: Refinery utilization was up by 0.5% from the prior week to 94.7%.

Oil Prices Jump

Following the massive inventory decline and storm-induced production losses, U.S. benchmark crude futures gained as much as 4.5% (or $2.60) to $60.43 per barrel Wednesday – the best settlement in more than a month.

The federal data sparked widespread buying in energy stocks, which pushed the Energy Select Sector SPDR – an assortment of the largest U.S. energy companies – up 1.28%. Consequently, some of, the biggest gainers of the S&P 500 included energy-related names like Diamond Offshore Drilling Inc. (NYSE:DO) , TechnipFMC plc (NYSE:FTI) and Concho Resources (NYSE:CXO) .

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