US crude oil inventories fell sharply last week, primarily driven by a hurricane-induced collapse in Gulf of Mexico production. The larger-than-expected inventory report has prompted the market to reassess the near-term supply outlook.

According to data released Thursday by the US Energy Information Administration (EIA), commercial crude inventories decreased by 8.6 million barrels to 415.6 million barrels for the week ending October 9, far exceeding market expectations. A Reuters survey of analysts had generally predicted a modest decline of just 288,000 barrels.

After Wednesday's US stock market close, data from the American Petroleum Institute (API) showed that US API crude inventories plunged by 11.123 million barrels last week.

The substantial reduction in crude stockpiles stemmed mainly from hurricane-related production shutdowns and declining imports. Meanwhile, gasoline inventories unexpectedly climbed, while distillate stockpiles tightened further.

Following the data release, crude and diesel futures prices remained largely stable, while gasoline futures extended losses due to the unexpected inventory build. On Wednesday, WTI crude rose 2.81%, with the gain occurring before the report was published.

Hurricane Severely Hits Gulf of Mexico Production

EIA data showed that US crude production averaged 13.7 million barrels per day last week, down 300,000 barrels per day from the prior week. Hurricane Isaias forced Gulf of Mexico offshore producers to evacuate platforms, with more than 70% of offshore oil production shut in as of last Friday. Most production reportedly resumed by Wednesday of this week.

"This report is entirely a hurricane story," said Bob Yawger, Director of Energy Futures at Mizuho Securities. "The hurricane swept through the Gulf of Mexico last week, and no one dared to ship crude there — everyone avoided it like the plague."

Import data corroborated this assessment. US crude imports fell by 791,000 barrels per day to 6 million barrels per day last week, with net imports declining by 596,000 barrels per day. Currently, US commercial crude inventories are about 3% below the five-year average for this time of year.

Notably, inventories at Cushing, Oklahoma — the NYMEX futures delivery hub — rose against the trend by 1.9 million barrels to 26.6 million barrels, while the Strategic Petroleum Reserve remained unchanged at 283 million barrels.

Refinery Throughput Rises, Exceeding Market Expectations

Despite the hurricane's impact on crude supply, refinery operations accelerated against the trend.

EIA data showed that refinery crude throughput increased by 135,000 barrels per day to 16.6 million barrels per day last week, with refinery utilization rising from 92.7% the prior week to 93.5%. A Wall Street Journal survey had previously expected utilization to decline by about 0.5 percentage points.

The strengthening refinery operating rates partly boosted refined product output and provided support for gasoline inventories.

Gasoline Inventories Unexpectedly Increase, Distillate Deficit Widens

On the refined products side, gasoline inventories rose by 3.5 million barrels last week to 208.3 million barrels, a sharp divergence from market expectations of a 900,000-barrel decline, and remain 4% below the five-year average. Meanwhile, implied gasoline demand fell by 362,000 barrels per day to 8.4 million barrels per day.

Distillate inventories (including diesel and heating oil) decreased by 2.5 million barrels to 102.6 million barrels, exceeding market expectations of a 1.6 million-barrel decline. They are now 12% below the five-year average, highlighting a more pronounced tightness in supply. Implied distillate demand rose by 673,000 barrels per day to 4.3 million barrels per day last week.

Matt Smith, Director of Commodity Research at commodity research firm Kpler, said: "Weaker implied gasoline demand drove the inventory build, while stronger implied diesel demand drove the inventory drawdown."