Energy Conundrum: Oil Prices Go Up Despite Rising Inventories, US Rig Count

© Fotolia / marrakeshhOil markets were negatively affected by Saudi Arabia's decision to cut prices for January deliveries to US and Asian customers.
Oil markets were negatively affected by Saudi Arabia's decision to cut prices for January deliveries to US and Asian customers. - Sputnik International
Despite a build in oil inventories and oil rig counts in the US, oil prices have extended gains following the US presidential elections and the OPEC production cut due to the broader anticipation of higher demand for crude oil amidst the industrial renaissance in the world's leading economies.

Kristian Rouz – Since Donald Trump's election as US President in November, global oil prices have rallied, as did crude stockpiles and US extraction, reflected by the upbeat oil rig count dynamics. Oil prices keep climbing despite the mounting downward pressure. In fact, the recent buildup in inventories and rig count would've resulted in a crash in the value of oil.

Albeit this is unlikely to happen this time around due to the expectations of the further gains in oil consumption across the world's leading economies, energy investors find themselves in the crosshairs of contradictory market indicators, rendering energy stocks underperforming in the dearer oil environment.

Oil barrel - Sputnik International
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In line with the OPEC oil production cuts and the anticipation of fiscal stimulus in the US, oil prices have gained roughly 20pc since early November. US oil prices have been above the psychological threshold of $50/bbl since December, and the recent increases in oil stockpiles and rapid re-commissioning of oil derricks in the US have failed to reverse the oil rally. Yet, energy investors are not rushing to discard these downward factors: the S&P energy index has faltered since Trump's electoral triumph, and is still 4pc down for the past twelve months.

Energy investors are lacking explicit optimism, as reflected by the stock market's dynamics, yet, most of them are maintaining their net-long positions in US oil futures and options, according to the US Commodity Futures Trading Commission data. This means that general market sentiment is that oil prices will keep rising: trade protectionism is gaining momentum in the US, and before long, American energy is poised to become quite expensive.

The lack of enthusiasm toward energy stocks might be explained by a simple fact that most US energy enterprises are reporting their quarterly earnings next week, and investors might be cautious ahead of data. Should the higher oil prices translate into substantially higher energy sector corporate revenues, energy stocks might catch up with the crude prices. Yet, the rebound in energy sector revenues might as well turn out to be a disappointment.

"Definitely we are going to need to see some proof in earnings to play catch-up here," Jeff Zipper of the Palm Beach, FL-based US Bank Private Client Reserve said. "Now we are going to see some clarity from when these companies report, at least in the sector, to see some follow through here."

The recent batch of data from the Energy Information Administration (EIA) rendered equity investors cautious: a report indicated a 14 mln bbl buildup in US crude inventories, sending US crude down to $51.22/bbl. Yet, the drop in price was brief, with oil rebounding back to $53/bbl after traders reassessed the absorption capabilities of the US refiners: despite the higher inventories, refineries in Louisiana and Texas could process greater amounts of crude than they are receiving presently, hence the push for the Dakota Access Pipeline (DAPL) and Keystone XL to be completed.

The US Environmental Protection Agency is going to review California’s underground injection control program amid concerns about the impact of oil and gas companies on the quality of drinking water in the region. - Sputnik International
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US imports have rallied by 19pc year-on-year, the EIA said, up to 3.97 mln bpd, with more barrels of imported Brent oil arriving in Houston. The Trump administration is adamant to close this gap in the US foreign trade balance sheet by hiking import tariffs and finally completing the DAPL and Keystone, bringing the North Dakotan and Canadian oil to the Gulf Coast refineries. Yet, this would take time, and oil prices are bound to increase as the US thirst for crude is exacerbating amidst higher economic growth projections.

Hedge funds kept buying into oil for at least four consecutive weeks ending on 31 January, as evidenced by weekly Commitments of Traders (COT) reports. Meanwhile, US petrol stockpiles surprisingly depleted by 869,000 bbl due to higher domestic demand, pushing retail prices higher. All these factors have resulted in US drillers having added 114 oil rigs to their count of active extraction furnaces since November, also helped by the OPEC oil production cut. The overall amount of working oil and gas rigs in the US is now 741, some 200 derricks more than a year ago, according to Baker Hughes data.

Dozens of protestors demonstrating against the expansion of the Dakota Access Pipeline wade in cold creek waters confronting local police, as remnants of pepper spray waft over the crowd near Cannon Ball, N.D., Wednesday, Nov. 2, 2016. - Sputnik International
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All this data suggests that, despite the increase in the US production, oil prices still have strong potential to extend their recent gains, mainly due to the processing capacity of US refiners massively exceeding the current levels of crude extraction. The lack of proper infrastructure, such as DAPL and Keystone, is also supporting further gains in oil prices.

Moreover, the Trump-proposed economic reforms in the US, gains in the post-Brexit UK manufacturing, and the recent stabilization in mainland China's growth are all factors supportive of a more expensive oil in the near-to-medium-term.

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