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Oil Jumps to 2-Year High on Inventory Drop, Keystone Closure

Oil rose to a two-year high on Wednesday boosted by Keystone pipeline outage and expectations that oil producing countries will agree to extend a production cut deal.

The U.S. Energy Department's inventory release showed that crude stockpiles recorded a lower-than-expected weekly draw. On a further bearish note, the report revealed that refined product inventories, gasoline and distillate, both rose slightly from their week earlier levels. Meanwhile, refinery activity improved.

However, the talking point from the data sets was the steady trend of rising domestic oil production that continues to be the biggest headwind for the market.

Despite the mostly negative data sets, the benchmark was buoyed by the fact that commercial inventories actually dropped after notching up successive weekly builds.

The U.S. oil benchmark also rallied on expectations that OPEC and other major producers will agree to expand their output-cut deal beyond March when they meet at the end of the month. The agreement, already renewed once, keeps 1.8 million barrels a day off the market in an attempt to clear a supply glut.

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Further support came from the shutdown of TransCanada Corporation’s TRP 590,000 barrel-per-day Keystone oil pipeline – one of the largest from Canada to the United States – due to a leak and subsequent cleanup operations.

As a result, the front month West Texas Intermediate (WTI) crude futures gained 2.1% (or $1.19) to $58.02 per barrel yesterday – the highest settlement since Jun 30, 2015.

Energy Stocks Gain

The bullish oil market sentiment encouraged buying in energy stocks, which lifted the Energy Select Sector SPDR – an assortment of the largest U.S. energy companies – almost 0.4% Wednesday. Some of the biggest gainers of the S&P 500 yesterday were oil and oil-related companies like Chesapeake Energy Corporation CHK, Range Resources Corporation RRC, Marathon Oil Corporation MRO, Southwestern Energy Company SWN and Helmerich & Payne, Inc. HP.

Analysis of the EIA Data

Crude Oil: The federal government’s EIA report revealed that crude inventories fell by 1.9 million barrels for the week ending Nov 17, following a rise of 1.9 million barrels in the previous week. The analysts surveyed by S&P Global Platts – the leading independent commodities and energy data provider – had expected crude stocks to go down some 2.1 million barrels.

An uptick in refinery demand led to the stockpile draw with the world's biggest oil consumer. But the withdrawal failed to match up with expectations as U.S. output rose by 13,000 barrels per day last week to 9.7 million barrels per day – the most since the EIA started maintaining weekly data in 1983.

Oil stockpiles have shrunk in 25 of the last 33 weeks and are down more than 76 million barrels since April. The gradual fall has helped the U.S. crude market shift from year-over-year storage surplus to a deficit. At 457.1 million barrels, current crude supplies are 6.5% below the year-ago period though they are in the upper half of the average range during this time of the year.

Meanwhile, stocks at the Cushing terminal in Oklahoma – the key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange – was down by 1.8 million barrels to 61.2 million barrels.

The crude supply cover was down from 28.3 days in the previous week to 27.8 days. In the year-ago period, the supply cover was 30.7 days.

Gasoline: Supplies of gasoline were up for the second straight week as production jumped. The small, 44,000 barrels addition – compared to the polled number of 1 million barrels rise in supply level – took gasoline stockpiles up to 210.5 million barrels. Despite last week’s increase, the existing stock of the most widely used petroleum product remains 6% below the year-earlier level but is in the middle of the average range.

Distillate: Distillate fuel supplies (including diesel and heating oil) edged up 269,000 barrels last week, contrary to analysts’ expectations for 1.8 million barrels decrease in supply level. The marginal weekly rise could be attributed to healthy production. At 125 million barrels, current supplies are 16.2% below the year-ago level and are in the middle of the average range for this time of the year.

Refinery Rates: Refinery utilization was up by 0.3% from the prior week to 91.3%.

About the Weekly Petroleum Status Report

The Energy Information Administration (EIA) Petroleum Status Report, containing data of the previous week ending Friday, outlines information regarding the weekly change in petroleum inventories held and produced by the U.S., both locally and abroad.

The report provides an overview of the level of reserves and their movements, thereby helping investors understand the demand/supply dynamics of petroleum products. It is an indicator of current oil prices and volatility that affect the businesses of the companies engaged in the oil and refining industry.

Want to Own an Energy Stock Now?

If you are looking for a near-term energy play, ConocoPhillips COP may be a good selection. This company has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

ConocoPhillips is a major global exploration and production company with operations and activities in 21 countries Over 30 days, the Houston, TX-based firm has seen the Zacks Consensus Estimate for 2017 and 2018 increase 38.5% and 15.2%, to 54 cents and $1.67 per share, respectively.

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Southwestern Energy Company (SWN) : Free Stock Analysis Report
 
Helmerich & Payne, Inc. (HP) : Free Stock Analysis Report
 
TransCanada Corporation (TRP) : Free Stock Analysis Report
 
Range Resources Corporation (RRC) : Free Stock Analysis Report
 
Chesapeake Energy Corporation (CHK) : Free Stock Analysis Report
 
ConocoPhillips (COP) : Free Stock Analysis Report
 
Marathon Oil Corporation (MRO) : Free Stock Analysis Report
 
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