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Oil tanks on surge in US supply, imports

Gas is flared off at an oil well site outside Williston, N.D.
Andrew Burton I Getty Images
Gas is flared off at an oil well site outside Williston, N.D.

Oil futures plunged Wednesday on a government report showing a surge in supplies of U.S. oil and a record level of gasoline production.

The U.S. is awash in oil, with record levels of production meeting a rising tide of imports. The U.S. Department of Energy said oil stocks rose by 7.26 million barrels, while analysts had expected a decline of 1.8 million barrels.

West Texas Intermediate futures for February, already sliding, took another leg lower after the report, which also showed a 4.1 million barrel build in gasoline, more than six times the expected amount. WTI was off more than 3 percent to $55.40 per barrel, and Brent slid once more below $60 a barrel.

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"Refiners produced the highest amount of gasoline ever reported by the EIA — 9.92 million barrels per day," noted Andrew Lipow, president of Lipow Oil Associates. He said refiners produced the second-highest amount of distillate fuel ever, at 5.24 million barrels per day, second only to 5.26 million barrels a day in December 2013.

Refineries were also running at a high rate, with utilization at 93.5 percent. "To be able to build crude inventories like that in the face of a 93.5 percent utilization rate is remarkable. Imports are also rebounding," said John Kilduff of Again Capital. He said imports of crude rose to 8.3 million barrels per day from 7.1 million the previous week.

"Imports were much higher than the market expected, and we saw it in Gulf Coast inventories," said Lipow.

U.S. production slipped slightly to 9.13 million barrels a day from 9.14 million barrels a day.

"If I had to guess (on the increase in imports), it was Saudi barrels headed for the Gulf Coast as part of their shock and awe," said Kilduff.

The growth in U.S. production, largely from shale drillers, is at the heart of OPEC's campaign to maintain its market share. The Organization of Petroleum Exporting Countries has said it would hold output at current levels, in an effort to force higher-cost non-OPEC producers to pare back on production.

OPEC officials have been talking oil lower since their late November meeting. This past week Saudi oil minister Ali al-Naimi and other officials attending an energy conference in Abu Dhabi reaffirmed OPEC's decision to hold output at current levels. He said the steep drop in oil prices was due to the lack of coordination among other non-OPEC producers as well as speculators and misleading information.

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Naimi said it was not in the interest of OPEC to cut production, no matter what the price is. "Whether it goes down to $20, $40, $50, $60, it is irrelevant," he was quoted as saying.

Lipow said this will be the first December since 2005 that crude oil inventory is building through the month. "We usually see a draw due to LIFO and ad valorem tax considerations. Crude oil inventory in the U.S.A. is about 20 million barrels higher than this time last year (5 percent). Gasoline inventory is 3 percent higher and distillate inventory is over 8 percent higher than this time last year," he said in a note.