Oil Prices Fall As U.s. Crude Stocks Shrink, But Product Supplies Climb

By Myra P. Saefong & Dan Strumpf, MarketWatch |

Analyst says crude-supply fall may be due to tax-related year-end destocking

Oil futures lost more ground Wednesday after U.S. government data revealed a weekly decline in crude stockpiles, but petroleum-product inventories rose much more than expected.

Analysts also suggested that the weekly decrease for crude supplies may be due to tax-related destocking that often happens at year-end.

January West Texas Intermediate crude CLF7, -1.41% lost 73 cents, or 1.4%, to trade at $50.20 a barrel on the New York Mercantile Exchange. It was trading at $50.41 before the supply data. February Brent crude LCOG7, -1.04%  shed 55 cents, or 1%, to $53.38 a barrel.

The U.S. Energy Information Administration reported that domestic crude supplies fell by 2.4 million barrels for the week ended Dec. 2. That was larger than the 2.2 million-barrel decline reported by American Petroleum Institute late Tuesday, according to sources. Analysts polled by S&P Global Platts had expected a fall of 1.7 million barrels.

Crude inventories saw a” solid drop, despite a rebound in imports, as refining activity increased,” said Matt Smith, director of commodity research at ClipperData.

But “gasoline and distillates both saw stockpiles rise as implied demand dropped for both on the prior week,” he said. “The solid builds to the products, despite being a seasonal trend, are helping to usher the crude complex lower.”

Gasoline supplies climbed by 3.4 million barrels and distillate stockpiles rose 2.5 million barrels, according to the EIA. The S&P Global Platts survey had forecast much smaller increases of 900,000 barrels for gasoline and 100,000 barrels for distillates.

On Nymex, January gasoline RBF7, -1.03%  traded at $1.529 a gallon, down less than a penny, while January heating oil HOF7, -0.74%  edged down by half a cent to $1.635 a gallon.

Tax-related fall in crude stocks

Troy Vincent, oil analyst at ClipperData, said the supply “report screams ad valorem tax preparations” as crude stocks fell despite refinery runs rising by just 134,000 barrels a day. Valorem tax refers to a sales or transaction tax.

He pointed out regional stock variations, including inventories along the Gulf Coast, which dropped by 6.9 million barrels, while stocks at crude storage hub Cushing, Okla., rose by 3.8 million barrels. That points to “logistical maneuvering ahead of ad valorem tax assessments in Texas and Louisiana at month’s end,” said Vincent.

Oil companies look to shed taxable assets such as oil from their books as they year’s end approaches.

Supply draws are “natural this time of year as destocking occurs due to year-end tax consequences,” said John Macaluso, an analyst at Tyche Capital Advisors.

And for now, crude prices are likely to see range-bound trading as market participants await the comments from the Organization of the Petroleum Exporting Countries’ meeting with non-OPEC oil producers this week, he said.

Last week’s OPEC meeting offered a production cut that could have limited impact in the long run, analysts say. But skepticism is rising over how likely individual cartel members will abide by production quotas.

“It has yet to be seen where the 600,000 [barrel a day] cut of non-OPEC production will come from,” particularly as Indonesia is now considered a non-OPEC producer, said Macaluso.

Questions also linger over whether non-OPEC members such as Russia will follow through on commitments to cut output. Reports of higher production by OPEC in November have also initially dampened sentiment, analysts said.

“[Skeptics] are also questioning how the cuts will be enforced, especially given OPEC’s history of breaking their own rules,” said Stuart Ive, private client manager at OM Financial. “These types of arguments trigger profit-taking and price consolidation, but there is always a flip side to these views.”

Still, traders widely expect prices to remain elevated into 2017 now that OPEC has reasserted its clout. BMI Research said it expects Brent prices to average $55 a barrel next year as the oversupply that has long weighed down prices comes to an end.

Natural-gas futures, meanwhile, resumed their climb to touch new one-year highs.

The recipe for a bullish winter 2016-2017 for natural gas would include a “dash of slowing production growth, a smidgen of higher export volumes and the pièce de résistance of some cold winter weather,” Nicholas Potter at Barclays said in a note Wednesday. “The missing ingredient had been the winter weather, but with December forecasts continuing to come in colder.”

January natural gas NGF17, +1.02%  rose 4.6 cents, or 1.3%, to $3.681 per million British thermal units.