Two Reasons Oil Is Rising, One Big Reason It May Stop (For Now)

Huge numbers from the EIA helped halt this week’s declining prices, with crude oil eking out small gains while refined fuels saw more sizable gains. Oil prices just barely managed to stay in the black, adding just 25 cents (0.4%) relative to the previous day’s close. Crude prices today are up by roughly the same amount, up 28 cents to $61.24.

Refined fuels saw more positive price activity yesterday, with diesel gaining 1.3 cents (0.7%) while gasoline gained a significant 3.8 cents (2.0%). Today, both prices are lagging behind crude’s slow growth. Diesel prices are currently just 0.4 cents higher than yesterday’s close, at $1.8914. Gasoline prices are up by a similar margin, gaining 0.3 cents to trade at $1.9277.

Why Markets Are Rising

Yesterday’s EIA inventory report gave a huge boost to oil prices. Despite rising refinery utilization (up 2% to 90% nationwide), the report showed strong gains in crude oil inventories along with steep draws for refined fuels.

The crude inventory build came mainly in the Gulf Coast, yet imports fell and exports rose last week. The Gulf crude build shows that U.S. production is growing rapidly, and there simply was not the refining capacity available to refine it into fuels. Strong refined fuel inventory draws sent refined fuel prices higher, dragging crude prices higher despite the 5-million-barrel crude build.

Along with the EIA report, Rex Tillerson’s removal from Secretary of State continues to put upward pressure on the market. Markets expect his replacement, Mike Pompeo, to have a destabilizing affect on international politics. Pompeo aligns much more closely with Trump’s foreign policy agenda than Tillerson. Specifically, the potential for sanctions on Venezuela and a withdrawal from the Iran Nuclear Deal have markets extremely nervous about future price risks.

Will Markets Keep Rising?

Crude oil has lost some of its financial appeal as the steep backwardation has flipped to slight contango. Contango means that future prices are higher than present prices. Because most financial investors invest in monthly futures that roll from month to month, they must sell their oil contracts at the end of the month and buy next month’s higher priced oil contracts, losing value. Until recently, the market has been “backwardated” – meaning next month’s future price was lower than this month’s price. Backwardation is beneficial for investors because they can sell at the end of the month and buy next month’s cheaper price, gaining value (sell high, buy low).

Financial markets have been at record high lengths in oil because investors could make money, via backwardation, even if the market was flat. With the market now flipping to contango, it’s very possible that investors could walk away with their profits. The resulting sell-off could send crude oil prices lower in the short-term, even if the fundamentals continue to show strong demand absorbing any new supply coming to the market.

Market Condition Report - Disclaimer
The information contained herein is derived from sources believed to be reliable; however, this information is not guaranteed as to its accuracy or completeness. Furthermore, no responsibility is assumed for use of this material and no express or implied warranties or guarantees are made. This material and any view or comment expressed herein are provided for informational purposes only and should not be construed in any way as an inducement or recommendation to buy or sell products, commodity futures or options contracts.

Sign up for FUELSNews for daily market information and insights
Sign Me Up
Make a Call

We are happy to discuss your business challenges over the phone and answer any questions.

800.695.6626

Send Email

Ask your toughest questions. We'll get back to you with the best answer humanly possible.

Send Email

Find a Location

Need to contact a specfic office? View contact information for offices across the country.

View Locations

Get a Quote

Let us know what type of fuel or service you need and a team member will get a quote to you quickly.

Get a Quote