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Oil rallies, then falls back as US hits record production – Government estimates on production matter, oil bulls are beginning to realize.

Oil rallied hard in New York’s morning session on Thursday before US crude closed down for a third day in a row as the government reported a record high production for last week. Brent crude finished just a little higher.

Oil prices gained almost $2 per barrel earlier in the day as traders threw caution to the winds, backing a market that dropped sharply over two prior days, after Monday’s 4% rally on the heightened fighting in the Middle East  — which many mistakenly thought would impact oil exports from the region.

All that bull fervor in oil evaporated about an hour after the US Energy (NASDAQ:USEG) Information Administration, or EIA, came out with its Weekly Petroleum Status Report. In that, the agency said US crude inventory balance climbed rose by 10.176 million barrels during the week to Oct. 6, the most since a weekly rise of 16.283M in mid-February.

In the prior week to Sept. 29, crude inventories saw a draw of 2.224M barrels. Industry analysts tracked by had predicted that decline to continue last week, forecasting a draw of 1.4M barrels for the week to Oct. 6

Crude exports up 300,000 barrels per day in just a week

But more riveting than that crude inventory spike reported by the EIA was its estimate for crude production last week. The agency gave that as 13.2M barrels per day — up 300,000 from the prior week. 

It was the highest ever government estimate on crude production, which prior to this had not exceeded the 13.1M peak reached just before the March 2020 outbreak of the coronavirus pandemic that decimated crude demand.

The EIA has been estimating higher crude production for the United States in recent months, citing higher efficiency in output from US shale oil basins despite a sheer cutback in the number of oil rigs actively deployed by drillers.

“It’s staggering how far US oil production has come in just a few months this year to reach this record high cited by the EIA,” said John Kilduff, partner at New York energy hedge fund Again Capital.

As for crude stockpiles, they ballooned last week as exports, often a juggernaut in the weekly EIA report, fell almost 2 million barrels to reach 3.067M per day versus the 4.956M per day level during the week to Sept. 29. 

Crude exports hit a record high just shy of 4 million barrels per day in the first half of the year, the EIA said in a separate report on Wednesday.

Processing of crude oil into fuel and other products also dropped last week, by almost 2%, to 85.7% as refineries went into maintenance.

“It’s the combination of lower exports and lower refinery runs that led to this humongous build in crude stockpiles,” observed Kilduff.

Crude exports tumble, in one-two punch for market

The one-two punch in record crude production and tumbling exports sent US oil prices back into the negative by the close.

New York-traded US West Texas Intermediate, or WTI, crude for delivery in November settled down 58 cents, or 0.7%, at $83.42 per barrel, after a session high of $85.20 earlier. WTI’s intraday low of $82.78 from earlier in the day appeared to close in on its five-week bottom of $81.50 struck on Friday amid a selloff triggered by concerns about global growth and ramping inflation.

London-traded Brent crude for the most-active December contract settled up just 18 cents, or 0.2%, at $86 — sharply off the session peak of $88.26. Its intraday low of $85.19, meanwhile,  put it closer towards the five-week bottom of $83.44 it registered on Friday.

The EIA inventory report wasn’t entirely bearish for oil.

While crude stocks rose, inventories of gasoline fell last week after the biggest build in nearly two years the week prior.  Distillate stockpiles extended their drop too.

Gasoline stockpiles fell by 1.313 million barrels last week versus a forecast drop of 1.0M and the prior week’s build of 6.481M, the EIA said. Gasoline is the No. 1 US fuel product.

Distillates inventories also fell by 1.837M last week, more than the forecast 1.0M and adding to the previous drop of 1.269M. Distillates are refined into heating oil, diesel for trucks, buses, trains and ships and fuel for jets.

These aside, the EIA reported a 0.319M barrel drop in storage levels at the Cushing, Oklahoma delivery point for US crude, versus the previous week’s rise of 0.132M. That prior week’s build was the first in months for Cushing. Until that week, there had been fears that Cushng stockpiles may drop to such critically low levels that would complicate any more withdrawals from the storage hub.


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