US crude oil stocks increased by 1.8 MMBbl last week. Gasoline inventories increased by 3.6 MMBbl while distillate inventories posted a decline of 0.5 MMBbl. Yesterday afternoon, API reported a crude oil build of 3.9 MMBbl, alongside gasoline and distillate builds of 4.6 MMBbl and 1.1 MMBbl, respectively. Analysts were expecting a more modest crude oil build of 2.8 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted a decrease of 2.7 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.
US crude oil production was estimated to be up 20 MBbl/d from last week, per EIA. Crude oil imports decreased by 4 MBbl/d last week to an average of 7.9 MMBbl/d. Refinery inputs averaged 16.2 MMBbl/d (635 MBbl/d more than last week), leading to a utilization rate of 89.8%. The report is bullish, as crude oil build was smaller than expected and total petroleum stocks posted a withdrawal. Prompt-month WTI was trading up $0.17/Bbl to $59.36/Bbl at the time of writing.
WTI prices traded in the $58-$61/Bbl range last week. Prices started this week relatively flat, after the steep decline last week following US production reaching 10 MMBbl/d. Prices in the beginning of the week were supported by a weaker dollar while being pressured by both EIA’s and IEA’s latest reports.
In its latest report released on Tuesday, IEA raised its forecast for oil demand growth in 2018 from 1.3 MMBbl/d to 1.4 MMBbl/d. IEA also said global inventories fell 154 MMBbl in 2017, or at a rate of 420 Bbl/d, and by year-end inventories were only 52 MMBbl above the five-year average. Under any circumstances this would have supported prices, especially considering the high compliance levels and continued supply cuts achieved by OPEC. However, along with a higher demand forecast, IEA also warned that the early market conditions in 2018 seem reminiscent of the first wave of US shale growth that was followed by the price crash, and that history could be repeating itself as US production growth in 2018 could single-handedly meet the higher global demand growth and potentially push up global oil inventories.
Bullish sentiment that was built on OPEC cuts and geopolitical unrest is slowly fading as recognition of US production reaching the historical high of 10 MMBbl/d sinks in, which also puts Saudi Arabia and Russia at risk of losing further market share. In its latest report, EIA said US shale production is set to rise by 111 MBbl/d in March and reach 11 MMBbl/d by the end of 2018. Increasing US production and the refinery maintenance season will put further pressure on prices in the near term while inventory levels slowly approaching their five-year average levels will support prices.
The declines in crude oil prices last week broke the major support at $60-$61/Bbl. That level is now the resistance, much like the last fall prior to the speculative run-up. The supply and demand elements of the crude market should begin to take over now that the speculatively induced price level has been deflated. While additional news regarding OPEC quotas, inventory normalization, or temporary supply disruptions due to geopolitical issues may create short-term price gains and volatility, the promise of additional growth from US producers is likely to limit longer-term extensions. It is critical that high quota compliance continue through 2018 and that the demand growth projected by the IEA occur concurrently in order for the market to have any chance of normalizing inventories back to what levels were prior to the price crash. Without inventory normalization, the price recovery cannot be sustained. Drillinginfo expects prices to return to the mid-$50/Bbl level for an extended period.
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