Week in Review

This week has been another busy week of trading for oil markets, with prices reversing their series of gains in recent weeks. Before this week, prices had gained in eight out of the past ten weeks, with a total price increase of $9.46. During that time, the largest weekly drop in prices was just 90 cents. This week’s loss of $1.65 (not including today’s price gains, which could shrink those losses) represents the largest weekly loss since mid-August. What caused prices to fall so steeply?

Markets have been propelled higher by bullish headlines, both political and fundamental. OPEC production cuts, strong global demand, and geopolitical risk factors have all helped create strong upward pressure for prices. This week, however, new bullish headlines were lacking, taking the wind out of traders’ sails.

Not only were headlines not supportive, some were firmly negative for prices. The API’s inventory report, released on Tuesday, showed a large surprise build for crude and gasoline, which cause a big sell-off of roughly $1.50. After that, no new risk factors came into play to push markets higher, so consumers got a relief from some of the highest prices.

The IEA on Tuesday released both their monthly and annual oil market reports, and the data was in favor of lower prices. According to the IEA, U.S. production will blossom over the coming five years, contributing roughly 80% of the growth in global production levels. On the flip side, OPEC will continue to keep volumes low. The organization also revised their short-term supply/demand outlook, indicating a slightly oversupplied market in Q4 2017 and Q1 2018.

Crude oil went from $56.90 at Monday’s opening call to $55.25 this morning, a loss of roughly -3%, though prices are receiving a boost today from OPEC chatter and the shutdown of a major oil pipeline from Canada. The crude stock build of almost 2 million barrels, while not as significant as the API’s reported 6.5 million barrel surplus, caused markets to pause from their exuberance. Up until this week, analysts had been proclaiming the tightness of oil markets, that demand was outpacing supply; an inventory build did not fit with this narrative, leading analysts to soften their tone.

Diesel prices tracked crude fairly well, though diesel only gave up 3 cents this week, or -1.6%. Diesel saw a draw in both the API and the EIA inventory reports, giving traders more confidence that diesel markets are tight. Additionally, expectations of a cold winter and strong heating oil demand are lending support to prices. Although refinery runs are high, leading to abundant supplies of diesel fuel, exports of that fuel led U.S. markets to remain fairly tight.

Gasoline prices fell nearly 11 cents this week, a massive loss of 6% for the week, as a surprise inventory build and high production rates combined to keep the contract down.  Unlike crude and diesel, gasoline prices have been steadily falling all week, with a tiny gain on Wednesday being offset but steep losses the rest of the week. Today, prices appear to be heading towards somewhat higher ground, though gasoline prices will take a while to recoup all of the losses seen this week.