Investing.com -- Saudi oil production cuts may no longer be the news; not even weak Chinese buying, perhaps. It’s U.S. production that’s demanding attention now, with crude output in the world’s largest economy projected to have reached a new three-year high last week.
U.S. crude sank below the key $80 per barrel support on Wednesday despite the U.S. Energy Information Administration, or EIA, citing a drawdown of almost 6 million barrels last week — virtually identical to what it reported as the prior week’s build.
The EIA’s reporting on crude stockpiles has turned volatile lately, with the agency citing a record draw of 17.049M barrels two weeks ago, as global stockpiles see shifts from a Saudi bid to cut an additional million barrels per day from their production while buying from top oil importer China slows.
A closer examination of the EIA’s weekly report showed last week’s crude draw possibly resulted from a spike in U.S. crude exports, which rose to 4.599M barrels from a prior 2.36M.
Notwithstanding the crude draw, market chatter was on U.S. production, which the EIA estimated last week at a new three-year high of 12.7M barrels per day.
In the previous week to Aug. 4, the EIA estimated crude production at 12.6M. Prior to these two weeks, the agency had not projected such a high number for output, following the record 13.1M barrels produced daily before the coronavirus outbreak in March 2020.
The EIA’s weekly tabulation of U.S. crude production does not come with notes. That left unexplained the production peak it estimated over the past two weeks — a phenomenon made all the more startling by the sheer plunge this year in the number of U.S. rigs drilling for oil.
Oil services company Baker Hughes said the U.S. rig count was unchanged at 525 last week. Still, that was way lower than the 2023 high of 623 noted during the week to January 13.
“The only explanation I can think of is higher drilling efficiency,” said John Kilduff, partner at New York energy hedge fund Again Capital. “The US technology for oil extraction is getting better by the day, thus the higher production even with the decline in the number of drilling rigs.”
The higher US production also comes at a time when Saudi Arabia, one of the world’s largest oil producers and head of the 13-nation Organization of the Petroleum Exporting Countries, is unilaterally cutting one million barrels per day of its production to force higher prices for crude.
U.S. crude rose from beneath to $65 per barrel in May to nearly $85 last week, largely due to the Saudi campaign. This week, however, it has declined, falling below $80 in Wednesday’s trading due partly on the report about the surging U.S. oil production and worries about an economic slowdown in China — the world’s largest oil importer.
Crude stockpiles fell by 5.960M barrels during the week ended Aug. 11, after the build of 5.851M in the prior week to Aug. 4, the EIA said. Industry analysts tracked by Investing.com had forecast a decline of just 2.32M for last week.
On the gasoline inventory front, there was a draw of 0.261M after the prior week’s 2.661M slide. Analysts had forecast a draw of as much as 1.26M for last week.
While automotive fuel gasoline is the No. 1 U.S. fuel product, demand for it has been lackadaisical this summer, with draws often coming below analysts' calls and weekly builds sometimes registered in the place of draws.
With distillate stockpiles, there was a surprise build of 0.296M versus a forecast draw of 0.473M and the prior week’s decline of 1.706M. Distillates are refined into heating oil, diesel for trucks, buses, trains and ships and fuel for jets.
The EIA report did not help the sentiment in oil, which could see its first weekly decline in eight if there’s no adequate turnaround by Friday’s close.
New York-traded West Texas Intermediate, or WTI, crude settled Wednesday’s trade down $1.61, or 2%, at $79.38 a barrel, WTI lost 2.6% in two prior sessions, bringing its week-to-date drop to 4.6%.
That was a breakaway from a previous seven-week rally inspired by optimism over Saudi production cuts that left the U.S. crude benchmark up 20% in all, with a 9-month high at $84.89.
“WTI crude looks like it is ready to consolidate here, which means downward pressures might target the $79.20 level,” said Ed Moya, analyst at online trading platform OANDA.
“Oil is also battling a strong dollar, which looks like it might not be done strengthening unless we get some action from China and Japan. The U.S. manufacturing outlook is still downbeat despite [being] boosted by rising auto production.”
London-based Brent crude settled down $1.44, or 1.7%, at $83.45. Week-to-date, Brent was down around 4% after a seven-week rally that gave oil bulls an 18% return and a seven-month high of $88.10.