Oil Slumps Despite Big U.S. Stock Draw, Production To Blame

The U.S. Energy Department's inventory release showed that crude stockpiles recorded its biggest drop since Sep on continued strong refinery runs. With oil supplies falling for the seventh week, investor sentiment has turned slightly positive on dissipating fears about a meltdown to sub-$40 levels. Analysts also believe that the trend, if sustained, could help tighten the market significantly.

However, the positive effect from the hefty crude inventory draw was more than offset by the steadily rising domestic oil output that continues to be the biggest headwind for the market. At 9.502 million barrels a day, production is at the highest level in more than two years, thereby cancelling out cuts from OPEC and its allies. Surprise builds in refined product inventories – gasoline and distillate – added to the pessimism.

As a result, West Texas Intermediate (WTI) crude futures shed 1.6% (or 77 cents) to $46.78 per barrel Wednesday.

Investors Dump Energy Stocks

The federal data sparked widespread selling in energy stocks, which pushed the Energy Select Sector SPDR – an assortment of the largest U.S. energy companies – down almost 1% Wednesday.

The two energy representatives in the 30-stock Dow Jones industrial average, ExxonMobil Corp. (NYSE:XOM) and Chevron Corp. (NYSE:CVX) were down 0.7%. Meanwhile, some of the biggest casualties of the S&P 500 were oil and oil-related stocks like Helmerich & Payne Inc. (NYSE:HP) , Diamond Offshore Drilling Inc. (NYSE:DO) , Hess Corp. (NYSE:HES) and Marathon Oil Corp. (NYSE:MRO) .

Analysis of the EIA Data

Crude Oil: The federal government’s EIA report revealed that crude inventories slumped by 8.95 million barrels for the week ending August 11, 2017, following a decline of 6.45 million barrels in the previous week.

The analysts surveyed by S&P Global Platts – the leading independent commodities and energy data provider – had expected crude stocks to go down some 3.6 million barrels. Continued strength in refinery crude runs led to the massive stockpile draw with the world's biggest oil consumer even as domestic production rose to the highest level since Jul 2015.

The seventeenth inventory reduction in 19 weeks has helped the U.S. crude market shift from year-over-year storage surplus to a deficit. Nevertheless, U.S. still remains awash with excess oil. At 466.49 million barrels, current crude supplies are in the upper half of the average range during this time of the year.

However, stocks at the Cushing terminal in Oklahoma – the key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange – was up a second week (this time by 678,000 barrels) to 57.05 million barrels.

The crude supply cover was down from 27.4 days in the previous week to 26.7 days. In the year-ago period, the supply cover was 31.2 days.

Gasoline: Supplies of gasoline were up for the second successive week as demand weakened. The nominal 22,000 barrels addition – contrary to the polled number of 400,000 barrels fall in supply level – took gasoline stockpiles up to 231.13 million barrels. Despite last week’s increase, the existing stock of the most widely used petroleum product remains 0.7% below the year-earlier level but is close to the upper limit of the average range.

Distillate: Distillate fuel supplies (including diesel and heating oil) went up by 702,000 barrels last week, as opposed to analysts’ expectations for 700,000 barrels decrease in supply level. The first weekly rise in five weeks could be attributed to fall in demand. At 148.39 million barrels, current supplies are 3.1% below the year-ago level but are in the upper half of the average range for this time of the year.

Refinery Rates: Refinery utilization edged down by 0.2% from the prior week’s 12-year highs to 96.1%.

About the Weekly Petroleum Status Report

The Energy Information Administration (EIA) Petroleum Status Report, containing data of the previous week ending Friday, outlines information regarding the weekly change in petroleum inventories held and produced by the U.S., both locally and abroad.

The report provides an overview of the level of reserves and their movements, thereby helping investors understand the demand/supply dynamics of petroleum products. It is an indicator of current oil prices and volatility that affect the businesses of the companies engaged in the oil and refining industry.

Stock to Buy

Given the bearish numbers above, it shouldn't come as a surprise that most of the companies from this space are set to underperform in the near term. Furthermore, the Oil-Energy sector has a Zacks Sector Rank in the bottom 13% (14 out of 16), so there is little hope for a turnaround soon. (To learn more visit: About Zacks Industry Rank.)

But if you are still looking to stay in this industry for a near term play, Range Resources Corp. (NYSE:RRC) may be a good selection. This company actually has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Headquartered in Fort Worth, TX, Range Resources is an independent oil and gas company, engaged in the exploration, development and acquisition of oil and gas properties primarily in the southwestern, Appalachian and Gulf Coast regions of the U.S. The 2017 Zacks Consensus Estimate for this company is 45 cents, representing some 116.5% earnings per share growth over 2016. Next year’s average forecast is 77 cents, pointing to another 69.5% growth. Range Resources has a VGM Score of “B.”

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