Oil drops as stockpiles remain near 30-year high

Oil prices plunged on Wednesday following the American Petroleum Institutes weekly report that showed crude reserves dropped much less than forecast during last week. Meanwhile, upbeat U.S. economic data, which was published on Tuesday, suggested the Federal Reserve is on the right track with its intentions to scale back the monetary easing program earlier than expected. The overall consistent U.S. economy recovery signs keep sighting a more stable oil demand in the future, which however is offset by slowdowns in China and Europe.

On the New York Mercantile Exchange, WTI crude for August delivery traded at $94.36 a barrel, down 1.01% on the day. Prices ranged between days high and low at $95.36 and $94.35 respectively. Light, sweet crude gained 0.2% yesterday after positive economic indicators from the U.S. supported demand outlook.

Meanwhile, Brent oil August futures traded 0.57% lower on the day after settling 0.11% higher yesterday. The European benchmark stood at $100.69 per barrel at 6:55 GMT, ranging between days high at $101.32 and low of $100.66 per barrel respectively.

In its weekly oil reserves report, the American Petroleum Institute said that crude inventories dropped by the minor 28 000 barrels to 392 million last week, well below expectations. Gasoline stockpiles jumped by 1.3 million barrels and distillate-fuel inventories rose by 527 000 barrels. However, APIs report is considered as less reliable than EIAs because it is based on voluntary information from operators of refineries, bulk terminals and pipelines.

The Energy Information Administration’s weekly crude oil inventories report is due today. A Bloomberg News survey shows crude reserves probably fell by 1.75 million barrels during the week ending June 21. Gasoline inventories are expected to have gained 875 000 million barrels. Distillate-fuel stockpiles should have risen by 650 000 barrels. Refineries probably operated at 89.6% of capacity, up 0.3% compared to the preceding period, which should be the highest level since December.

Crude inventories last month swung between a drop of as much as 6.3 million barrels and an increase of 3 million, according to EIA data. Reserves reached a three-decade high in June, standing at $396.3 million barrels. Michael McCarthy, a chief market strategist at CMC Markets in Sydney said for Bloomberg: “The high volatility in the weekly numbers over the last six weeks is a bit of a concern, with major draws and then replenishment. Clearly we are expecting to see declines over the next weeks and months.”

Upbeat U.S. data

Strong U.S. data yesterday gave a boost to confidence in oil as signs of consistent economic recovery hinted at steady demand outlook. The U.S. Commerce Department said that Durable Goods Orders stood at 3.6% for May, 0.6% higher than the 3% forecast, equaling April’s 3.6% revised reading. Core durable goods (Durable Goods Orders ex Transportation), which exclude the more volatile transportation items, outperformed expectations of a decrease to 0%, standing at 0.7%. Last month’s revised reading was at 1.7%. Core Durable Goods ex Defense also exceeded anticipations, surging to 3.5%, compared to the 2.7% forecast and April’s 2.5% revised reading. Meanwhile, the S&P/Case-Shiller Composite-20 Home Price Index showed home prices jumped to 12.05%, surpassing 10.06% expectations and April’s 10.85% revised figure. Meanwhile, the U.S. Census Bureau reported New Home Sales exceeded forecasts of a decrease to 0.460 million from last month’s 0.466 reading. May’s indicator unexpectedly rose to 0.476 million, supporting previous data for economic recovery. The Conference Board, a market research group also reported that Consumer Confidence in the U.S. reached a five-year high, going well above expectations. CCI stood at 81.4 for June, compared to 76.2 for the preceding month and surpassing projections of 75.

Positive U.S. data, however, also supported Feds intention to scale back its monetary stimulus, which Ben Bernanke said last week will probably happen during the second half of the year. Bond purchasing is expected to come to an end mid-2014 if the economy recovers in line with expectations. WTI is headed for a 2.8% decline this quarter, while the European benchmark will probably mark an 8.4% loss for the past three months, a third consecutive quarterly drop.

Carl Larry, president of Houston-based consultancy Oil Outlook and Opinions LLC said for Reuters :”The data supports the decision by the Fed to pare back stimulus. What we have now is modest but sustained economic growth in the United States, but flatlining and lower growth in China and Europe respectively, that basically evens out and it leaves us with a very flat outlook on demand.”

Europe is still struggling to come out of recession, while China received another downward revision of its GDP growth forecast this week by Goldman Sachs. The Asian country’s GDP forecast for 2013 was cut to 7.4%, down from 7.8% and below the official target of 7.5%. China’s economy is also expected to expand less in 2014 than anticipated. The 2014 forecast was revised down to 7.7%, down from 8.4%. Earlier, during the last week of May, the IMF cut its own economy growth forecast to 7.75%, down from 8%. China is the worlds second biggest oil consumer and accounts for 11% of global consumption.

“The market is still oversupplied, OPEC is still pumping at around 30 million barrels, and demand is flat. So unless we see some change on production, I expect to see an overhang going into the summer”, Carl Larry said.