Oil Drops As U.S. Oil Production Suddenly Increases

U.S. Domestic Oil Production Jumps To 11 Million Barrels Per Day

EIA has just provided its new Weekly Petroleum Status Report. As always, traders were eager to learn the latest inventory dynamics.

U.S. crude oil inventories increased by 1.4 million barrels while gasoline inventories decreased by 1.7 million barrels and distillate fuel inventories increased by 0.25 million barrels.

Imports were down by 0.1 million barrels per day (bpd) compared to the previous week, so the increase in crude inventories had another source…

This source is the rapid increase in U.S. domestic oil production. In the previous week, EIA reported that domesic oil production was 10.5 million bpd. This week, it has increased to 11 million bpd.

This is a material bearish catalyst for WTI oil as it means that prices near the $40 level are sufficient enough to bring back some of production. This development is really surprising since most market observers believed that sub-$40 prices were not sufficient enough to provide support to the U.S. shale industry.

Before the new EIA report, oil struggled to settle above the $40 level. Now, it will need even more catalysts to get above this level as traders will worry that a move above $40 will lead to an increase in U.S. domestic oil production.

The Recent Rally Is Put To A Test

Finally, the oil rally, which did not have any meaningful pullbacks for several months, is put to a test. The EIA Weekly Petroleum Status report is certainly bearish due to a rapid increase of U.S. domestic oil production and the continued increase in crude oil inventories.

At the same time, the global markets are once again worried about a potential second wave of coronavirus which could put pressure on oil demand. The near-term catalysts are bearish, so any support for oil will come from those traders who believe in the longer-term improvement of oil fundamentals.

The spread between the front-month contract and the December 2020 contract is less than $1. Such spreads are typical for a normal situation in the markets, although the current market environment is anything but normal. At this point, it looks like we’ll see more oil price volatility in the upcoming trading sessions.

For a look at all of today’s economic events, check out our economic calendar.