Oil prices sank to a three-month low on Thursday despite strong U.S. federal data that would have usually been expected to send prices higher. Analysts told Zenger that was because the prevailing sentiment in markets has become negative.

Data from the U.S. Energy Information Administration showed a drop in commercial inventory levels of crude oil, gasoline and distillates, such as diesel, for the week ending Aug. 13. A drop in inventories tends to indicate increasing levels of market demand.

Crude oil inventories, in particular, declined by 3.2 million barrels week-on-week and remain about 6 percent below the five-year range. It was the second drop in as many weeks, suggesting the appetite for crude oil was strong, and that prices should rise.

The market, however, felt otherwise.

West Texas Intermediate, the U.S. benchmark for the price of oil, was down more than 1 percent on Wednesday and trading near $65 per barrel.

The U.S. Federal Reserve also hinted it may pull back on its support mechanisms for the dollar, which shook markets given the renewed economic threats from the pandemic.

Upcoming contract expiration for crude oil, coupled with broad-based retreat to safer shores ultimately hammered crude oil prices. By Thursday, most oil benchmarks had collapsed. West Texas Intermediate was trading at its lowest point since May.

Crude oil storage levels declined by a level that should be bullish, but the market focused on more negative news. (Photo: Wikimedia Commons)

With lingering concerns about the spread of the Delta variant of the coronavirus bruising not only economic momentum, but consumer confidence as well, the U.S. benchmark is down more than 11 percent so far in August.

Tamas Varga, an analyst at oil broker PVM, told Zenger the September contract for West Texas Intermediate expires on Friday. That could explain some sell-off as traders move into new positions, though futures contract showed lingering negativity prevails.

While pointing to the strong economic recovery, minutes from the late-July meeting of the U.S. Federal Reserve’s Open Market Committee show the pandemic is still creating broad-based market headwinds.

“Concerns about the worldwide spread of the Delta variant weighed somewhat on risk sentiment in global financial markets over the intermeeting period,” the minutes read.

Nevertheless, the Energy Information Administration reported that the total amount of refined petroleum product supplied to the market remained above pre-pandemic levels, at an average of 20.5 million barrels per day over the last four-week period.

The market uses that data as a loose barometer for demand.

Total motor gasoline supplied to the market has been relatively stable over the past month or so. But the federal energy data on gasoline stocks showed a weekly decline, which analysts said is not surprising considering seasonal factors.

“This is a bullish report, which could easily be overwritten by the unexpected build in gasoline stocks,” Varga said.

Lingering strains from the COVID-19 pandemic continue to weigh on broader markets. (Photo: Wikimedia Commons)

Total motor gasoline inventories increased by 700,000 barrels in the week ending Aug. 13. Consumer demand for road fuels typically drops off between the July 4 holiday and the end-of-summer Labor Day.

“The summer driving season is over,” said Denton Cinquegrana, the chief oil analyst at the Oil Price Information Service.

Overall demand could be under renewed threat from COVID-19. Many businesses have already enacted their own new mask policies, and some cities and states have also reintroduced in-door mask mandates, even for those who are fully vaccinated.

From Europe, Giovanni Staunovo, a commodities analyst at Swiss investment bank UBS, suggested that negativity seems to be reigning supreme, with the market reaction squarely focused on the bad news in gasoline inventory levels.

“My takeaway is the EIA report should have been taken positively by market participants,” he said, speaking of the Energy Information Administration data.

Edited by Bryan Wilkes and Alex Willemyns

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