Crude Oil Surges Following Robust Inventory Draw as Geopolitics Generates Volatility

Crude oil prices are breaking out as geopolitical events and declines in stockpiles are generating bullish sentiment.  President Trumps decision to tear up the Iran nuclear agreement, is generating volatility and upside momentum.  If sanctions are re-established on Iran, the country will reduce production which could further buoy oil prices. Both the API and the EIA reported larger than expected draws in petroleum inventories which is creating an underlying bullish fundamental backdrop.

Technicals

Crude oil prices surged higher closing above 71-per barrel for the first time since 2014.  Prices broke out, and are poised to test target resistance near the 2011 lows at 75. Support is seen near the 10-day moving average at 68.91. Momentum has turned positive as the MACD (moving average convergence divergence) index generated a crossover buy signal. This occurs as the MACD line (the 12-day moving average minus the 26-day moving average) crosses above the MACD signal line (the 9-day moving average of the MACD line).

Refinery Inputs Slipped

The EIA reported that U.S. crude oil refinery inputs averaged about 16.5 million barrels per day during the week ending May 4, 2018, 75,000 barrels per day less than the previous week’s average. Refineries operated at 90.4% of their operable capacity last week. This compares to last year’s run rate at 95%.  Refiners cannot run at maximum levels since there is not enough oil available to refine. Gasoline production decreased last week, and distillate fuel production remained virtually unchanged last week, averaging 5.0 million barrels per day.

Imports Continue to Decline

The EIA revealed that U.S. crude oil imports averaged over 7.3 million barrels per day last week, down by 1,226 thousand barrels per day from the previous week. Over the last month, crude oil imports averaged about 8.1 million barrels per day, down 1.0% year over year.

Inventories Are Falling

The decline in imports was slightly-offset by a rise in U.S. production which moved above 10.7-million barrels a day.  This provided a backdrop where stockpiles declined. The EIA reported that crude oil inventories decreased by 2.2 million barrels from the previous week. Expectations were for a 0.5-million-barrel draw. U.S. crude oil inventories are in the lower half of the average range for this time of year. Gasoline inventories decreased by 2.2 million barrels last week, while distillate fuel inventories decreased by 3.8 million barrels. Total commercial petroleum inventories decreased by 1.5 million barrels last week.

Demand Remains Solid

The Department of Energy also revealed that demand is rising. The EIA reported that total product demand over the last month was 20.3 million barrels per day, up by 2.7% from the same period last year. Over the last month, gasoline demand averaged about 9.5 million barrels per day, up by 2.2% from the same period last year. Distillate fuel demand averaged over 4.2 million barrels per day over the last month, up by 4.1% from the same period last year.

The American Petroleum Institute Reported a Surprise Draw

Crude prices received another push higher following a report from the American Petroleum Institute (API) which was more bullish that expected. The American Petroleum Institute reported a draw of 1.85 million barrels to the U.S. crude oil inventories for the week ending May 4, compared to analyst expectations that this week would see a smaller draw in crude oil inventories of 720,000 barrels. The reversal came following last week’s larger than expected build reported both by the API and the Department of Energy.

The API also reported a draw of 2.055 million barrels of gasoline for week ending May 4 which also was a bigger draw than the 450,000-barrel expected. Distillate inventories saw a huge draw this week of 6.674 million barrels. Analysts had forecast a much smaller decline of 1.375 million barrels. Inventories at the Cushing, Oklahoma, site was the only build this week, with the API reporting a 1.653-million barrel build.