Oil falls on expectations of inventory builds

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The combo of a bearish U.S. crude oil inventory report on Monday followed by expectations for another large build in crude oil stocks in Wednesday’s EIA oil inventory report sent futures prices tumbling on expiration day for the November WTI contract (NYMEX:CLX13). The rest of the WTI forward curve followed suit declining across the board. The Dec/Jan contango continued to widen while the Dec Brent/WTI spread surged higher by over 17% of about $1.70/bbl.

Market participants pretty much ignored the bearish unemployment number insofar as WTI was concerned but did in fact view it favorably for Brent. A weak jobs report suggests to the market that tapering of QE3 may not come in the short term. Brent ended the day in positive territory with only modest losses for US refined products as the WTI based crack spreads widened modestly on the day. A widening of the WTI based cracks suggests that US refiners are going to ramp up very quickly once maintenance season is over as US refiners have a noticeable advantage over European based refiners which are tied to a much higher valued Brent price.

The market remains bearish toward WTI on concerns of a potentially growing surplus of crude oil in the US. That said PADD3 total crude oil stocks are only about 3.8 million barrels above last year at this time while Cushing stocks are 11.1 million barrels lower. So at the moment there is not a huge surplus of crude oil in the USGC compared to last year but the market is viewing the recent increase in PADD3 stocks as a potential growing surplus in progress and thus bearish for WTI.

On Tuesday the EIA released a new Drilling Productivity Report for the US. EIA's new Drilling Productivity Report (DPR) takes a fresh look at oil and natural gas production, starting with an assessment of how and where drilling for hydrocarbons is taking place. The six regions analyzed in the report account for nearly 90% of US oil production growth and virtually all domestic Natural Gas production growth during the 2011-2012 period. Following are some of the highlights of the report:

  • Total crude oil production from the six areas is expected in increase by about 62,000 bpd in November compared to October production with the majority of the increasing coming from Bakken and Eagle Ford.
  • Total crude oil production for the six areas is expected to average 3.7 million barrels per day.
  • Bakken month over month (November over October) crude oil production expected to increase by 26 mbpd to about 961 mbpd.
  • Eagle Ford month over month (November over October) crude oil production expected to increase by 24 mbpd to about 1.1 million bpd.
  • Haynesville month over month (November over October) crude oil production expected to increase marginally by 1 mbpd to about 62.1 mbpd.
  • Marcellus month over month (November over October) crude oil production expected to increase slightly by 3 mbpd to about 51.2 mbpd.
  • Niobrara month over month (November over October) crude oil production expected to increase by 7 mbpd to about 267 mbpd.
  • Permian month over month (November over October) crude oil production expected to increase slightly by 1 mbpd to about 1.3 million bpd.
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