US crude oil stocks posted an increase of 3.6 MMBbl last week. Gasoline inventories decreased 0.8 MMBbl while distillate inventories increased 2.6 MMBbl. Yesterday afternoon, API reported a crude oil build of 3.45 MMBbl, alongside a gasoline draw of 2.6 MMBbl and a distillate build of 1.2 MMBbl. Analysts were expecting a smaller crude oil build of 0.77 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted an increase of 2.4 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.
US crude oil production remained unchanged last week, per EIA. Crude oil imports were up 608 MBbl/d last week, to an average of 8.2 MMBbl/d. Refinery inputs averaged 17.6 MMBbl/d (698 MBbl/d more than last week), leading to a utilization rate of 95.6%. The report is bearish due crude oil and total petroleum stocks build. Prices are being pressured by the inventory builds, uncertainty about demand, and supply overhang, while the anticipation on positive results from the upcoming G20 and OPEC meetings is giving some support to prices. Prompt-month WTI was trading down $0.72/Bbl, at $50.84/Bbl at the time of writing.
Prices hit their lowest since October 2017 on Friday as WTI fell nearly 8% percent and touched $50.15/Bbl. Prices rose slightly on Monday following the stock market rally and due to the upcoming G20 meeting in Argentina as well as the next OPEC meeting in Vienna; however, they are still trading near their lowest levels for almost a year.
Ever since reaching their four-year highs in early October, prices have been on a downward spiral and have fallen nearly 33% in just eight weeks, as market sentiment shifted from bullish to bearish due to rising supply levels and weakening economic and demand growth projections, which pointed to a supply glut at the end of 2018 and moving into 2019. Rising supply levels were largely due to OPEC (led by Saudi Arabia) and Russia increasing production in anticipation of the Iranian sanctions and the US reaching historically high production levels. The granting of waivers to eight countries for Iranian sanctions by the US government caught everyone by surprise and was the final blow to prices.
The market sentiment remains bearish due to fears of another large supply overhang, as the world’s top three producers (Russia, US, and Saudi Arabia) are all producing at record levels and demand growth projections remain weak. Prices could see further pressure as supply levels are still rising; Saudi Arabia production in November is projected to be above 11 MMBbl/d, which would be an all-time high for the Kingdom. As things stand, prices will be pressured by fundamental supply/demand levels, which all point to a supply overhang. The upcoming G20 meeting in Argentina later this week; and the OPEC meeting in Vienna on December 6 will give some support to prices, as the market anticipates some resolutions in US-China trade disputes and the OPEC supply cut talks in 2019 to mitigate the supply overhang.
Although OPEC and Saudi Arabia hinted that they are willing to cut production levels to bring balance to the market, the skepticism about whether the Kingdom can accomplish the supply cuts is increasing with Russia’s stance on joining the supply cuts and US President Donald Trump’s pressure on Saudi Arabia to keep production levels high in order to maintain lower prices. President Trump has been very vocal on Twitter about his willingness to keep oil prices low, and he wants Saudi Arabia and OPEC to steer away from any production curtailments. Under normal circumstances the headlines around OPEC and Saudi Arabia discussing production cuts would have increased prices. However, President Trump’s decision to refrain from acting against Saudi Arabia over the assassination of the journalist Jamal Khashoggi gives him the leverage to force the Kingdom into keeping prices low and not reducing supply. Saudi Arabia seems to be cornered ahead of the OPEC meeting, with President Trump’s leverage on the assassination and potentially using it against them if they decide to reduce supply.
The extensions downward have taken prices well below support. On Friday, prices were three standard deviations below the 20-week moving average. This negative pressure also took momentum indicators into extreme oversold levels not seen since the price collapse in August 2015. History confirms that when WTI extends into extreme levels, a countertrade is likely to occur in the near term. If additional declines materialize, expect the lows from October 2017 ($49.18/Bbl) and August 2017 ($45.58/Bbl) to find buyers. Should a countertrade materialize, last week’s high ($57.44/Bbl), up to the previous week’s high ($61.28/Bbl), will limit gains. Drillinginfo continues to believe the long-term range for prices will occur between $60/Bbl and $65/Bbl for an extended period, with the near-term market trading within the $51-$61/Bbl range as the market waits to hear news from the next OPEC meeting.