WTI extends losses as low refinery utilization offsets drop in crude reserves

Oil prices extended losses on Wednesday as the Energy Information Administration said in its weekly oil inventories report that refineries operated at the lowest rate since June. This offset news that crude reserves fell more than analysts projected. Gasoline stockpiles also declined and distillate fuel inventories jumped, generally in line with expectations.

On the New York Mercantile Exchange, WTI crude for September delivery traded at $105.83 per barrel at 15:16 GMT, down 0.91% on the day. Prices ranged between days high at $106.88 and a freshly hit low of $105.62 per barrel. Light, sweet crude rose 0.20% on Tuesday but erased its weekly advance to trade 0.3% lower on a weekly basis.

Meanwhile on the ICE, Brent crude for delivery in October stood at $108.21 a barrel at 15:18 GMT, down 0.25% on the day. Futures held in range between high and low of $108.48 and $107.77 a barrel respectively. The European benchmark rose 0.27% on Tuesday trimming its weekly decline to less than 0.1% below the neutral level.

Oil extended its daily losses as the Energy Information Administrations statistics showed refinery utilization declined last week. Refineries operated at 89.4% of their operable capacity, 1.5% lower compared to the preceding week. This was the first time the rate dropped below 90% since June 14 and biggest drop since April 19. Both gasoline and distillate fuel production decreased and averaged 9.1 million and 4.9 million barrels per day respectively.

According to EIAs report, as of the week ending August 9, U.S. commercial crude oil inventories fell by 2.8 million barrels to 360.5 million, beating analysts prediction for a 1.5 million drop.

Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors, said for Bloomberg: “You are seeing a bigger-than-expected draw. As we get into the fourth quarter, we will start to see builds in inventories. If the Fed starts tapering, we’ll see weakness in crude.”

Meanwhile, total gasoline stockpiles fell by 1.2 million barrels last week, remaining near the upper limit of the average range for this time of the year. At the same time, distillate fuel reserves rose by 2.0 million barrels and kept being near the lower limit of the average range.

Both underperformed economists expectations. According to a Bloomberg survey, gasoline reserves were predicted to have dropped by 1.6 million barrels, while distillate fuel stockpiles should have risen by 1 million barrels.

Stockpiles at Cushing, Oklahoma, the biggest U.S. storage hub and delivery point for futures traded on the New York Mercantile Exchange, fell by 1.36 million to 38.5 million barrels, a sixth straight weekly decline and the longest streak since September 2011.

QE outlook

Meanwhile earlier in the day, the U.S. Labor Department reported that a drop in gasoline and natural gas prices held back its seasonally adjusted producer inflation. The government agency said that month-on-month, the U.S. Producer Price Index remained flat in July, confounding expectations for a 0.3% surge after a 0.8% rise in June. On an annual basis, the index advanced by 2.1%, again below market projections for a 2.4% gain and below the previous period’s 2.5% jump.

The U.S. Labor Department also reported that month-on-month Core PPI, which excludes the more volatile energy and food costs, also underperformed analysts’ expectations and June’s 0.2% advance and rose by only 0.1%, which gave investors a sign that Fed’s monetary stimulus might remain untouched for a while longer. Year-on-year, Core producer inflation rose by 1.2%, the lowest reading since November 2010. This was below an anticipated 1.3% gain and June’s 1.7% surge.

Dollar-denominated commodities have largely been tracking shifting expectations for an earlier-than-expected tapering of Fed’s monetary easing program, on which the strength of the dollar is determined. A further delay of Quantitative Easing tapering would support oil prices. However, according to a Bloomberg survey this month, 65% of the polled economists expect Fed to begin decelerating its bond purchasing program after FOMC’s September meeting, compared to 50% in July. First wave of cuts should be of $10 billion, analysts said.