Huge Build in Distillates Offsets Bullish Crude Oil Data

Crude oil futures were down over 2 percent on Wednesday, giving up earlier gains, after government data showed large weekly builds in U.S. petroleum products offset a surprise draw in crude oil.  According to the U.S. Energy Information Administration, crude inventories fell 559,000 barrels during the week ended September 9. Traders were looking for a build of 3.8 million barrels.

The main story wasn’t crude’s surprise draw, however, it was in the products section of the report. The EIA reported that inventories of distillates, which include diesel and heating oil, rose by 4.6 million barrels in the week to September 9, versus pre-report estimates of an increase of 1.5 million barrels. The news was bearish enough to force crude oil longs out of their positions.

The EIA also reported that gasoline stocks rose by 567,000 barrels. Traders were looking for a 343,000 barrel gain.

Essentially it was a mixed report – bullish for crude, but bearish for the products. October West Texas Intermediate Crude Oil fell 2.1 percent on the news to $43.97. Internationally-favored Brent Crude Oil was down 92 cents at $46.18.

Gold futures reversed earlier weakness as the U.S. Dollar fell against a basket of currencies. At 1745 GMT, December Comex Gold was trading $1326.50, up $2.80 or +0.21%. Demand for gold rose after traders reduced the chances of a Fed rate hike at next week’s meeting on September 21 to just 15 percent.

September U.S. Dollar Index futures posted a volatile two-sided trade, driven in both directions by the price action in the USD/JPY. Early in the session, the Dollar rose against the Japanese Yen after a report from a Japanese newspaper said the Bank of Japan was considering expanding its current monetary policy by lowering already negative rates.

The USD/JPY began to give up its earlier gains after skepticism grew that the BOJ would ramp up its stimulus program. Traders now believe the BoJ will be more divided when it meets on September 20-21 and not take a dovish stance as previously thought.

Higher equity prices helped boost demand for the higher-yielding Australian and New Zealand Dollars. Meanwhile the USD/CAD only moved marginally higher after the sell-off in crude oil. Canadian Dollar traders were more focused on the Fed’s interest rate decision than on the volatility in the oil market.

With their focus on the direction of U.S. interest rates, Euro traders ignored a weaker than expected industrial production report. On Wednesday, Eurostat reported that industrial production was down 1.1% in June compared to a 0.8% increase the month before and the pre-report estimate of minus 0.9%.

The GBP/USD firmed after the release of today’s mixed U.K. jobs report. Traders interpreted it to mean that the labor market was performing better-than-expected after the Brexit vote.