Crude Prices Drop Again Despite Stockpile Decline

Qatar is calling for increased investment in the oil and gas markets.

The Energy Information Administration on Thursday provided a dramatic study in contrasts, with U.S. crude stockpiles falling more than expected last week and gasoline and distillate inventories rising - but that meant only one thing to traders sensitive to the perception of rising stockpiles and waning demand, and they in turn caused oil prices to plummet more than 1 percent.

According to the EIA, Crude inventories fell 4.3 million barrels in the week to August 31 compared with analysts' expectations for a 1.3 million barrel decreases; total stockpiles are 401.49 million barrels, the lowest levels since February 2015.

However, gasoline stocks rose by 1.8 million barrels, compared with analysts' expectations in a Reuters poll for a 810,000 barrel decline, and distillate stockpiles, which include diesel and heating oil, rose by 3.1 million barrels, compared with expectations for a 742,000 barrel increase.

John Kilduff, founding partner at Again Capital, said of the figures, "The slow climb back of crude oil levels at Cushing is somewhat bearish, and the absence of Chinese buyers of U.S. crude oil is depressing export volumes.

"Domestic production is not growing at the pace it was earlier in the year, either."

Traders apparently shared Kilduff's concerns: West Texas Intermediate fell 95 cents to settle at $67.77 per barrel, while Brent dropped 77 cents to trade at $76.50 per barrel - a continuation of losses that have characterized trading this week.

Of course, many factors have influenced market performance, and Ole Hansen, senior manager at Saxo Bank, noted that "In the last week we've seen the focus shift again from supply back to demand and the continued calamity in emerging market stocks, bonds, and currencies is weighing on the medium- and longer-term demand outlook."

It was said that prices were prevented from falling further thanks to persistent worries over the U.S. sanctions against Iran, specifically, to what degree they will tighten the market when the second round of sanctions kicks in on November 4.

Jefferies said, "the Brent forward curve has inverted to backwardation, signalling a tightening market that already feels the effects of declining Iranian exports."

However, for the time being at least, the focus is on rising output and decreasing demand, as expressed by Fawad Razaqzada, analyst at Forex: "The prospects of increased supplies from OPEC and her allies, and weaker demand from China and other emerging markets could weigh further on oil prices going forward, or at least limit the upside potential.

"This is because of the U.S. dollar's strength, weighing heavily on emerging market currencies, including the yuan, which in turn has pushed up the costs of all dollar-denominated commodities."

Presumably, this week's poor market performance didn't bother Mohammed al-Sada, energy minister for Qatar: on Thursday he urged oil producing countries to take advantage of the still relatively high prices and boost investment in the oil and gas sector.

Noting that the issue would be discussed during a meeting of the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC countries in Algeria at the end of the month, al-Sada said, "While the oil price has been recovering, the only thing now is to see an adequate level of investment going back to the oil sector...from the government point of view, we would like to act as a catalyst;f there are bottlenecks or hurdles, we will work hand in hand with investors, but we leave it to the market to determine the level of investment."

Earlier this week it was reported that Saudi Arabia and many other OPEC countries are aiming to keep crude in the $70-$80 per barrel range, supposedly a level that is palatable for emerging economies yet high enough for them to be able to make enough revenue to finance economic development projects.