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US crude oil stocks decreased 5.3 MMBbl last week. Gasoline and distillate inventories increased 1.3 MMBbl and 6.2 MMBbl, respectively. Yesterday afternoon, API reported a large crude oil draw of 8.6 MMBbl, alongside gasoline and distillate builds of 2.1 MMBbl and 5.8 MMBbl, respectively. Analysts were expecting a crude oil draw of 2.7 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted a significant increase of 10.1 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 down 100 MBbl/d from last week, per EIA. Crude oil imports were down 123 MBbl/d last week, to an average of 7.6 MMBbl/d. Refinery inputs averaged 17.9 MMBbl/d (210 MBbl/d more than last week), leading to a utilization rate of 97.6%. Although total petroleum stocks posted a significant build, large crude oil withdrawal, Hurricane Florence increasing strength and approaching the coast and EIA lowering it’s crude output expectations for 2018 and 2019 are supporting prices. Prompt-month WTI was trading up $1.67/Bbl, at $70.92/Bbl at the time of writing.

Prices traded in the tight range of $67/Bbl to $68/Bbl. Supply shortage worries and a weaker global demand growth were the continuing headlines that pulled prices in both directions. Prices surged over 2% on Tuesday as bullish sentiment increased. The surge in prices was due to Hurricane Florence gaining strength, Iranian sanctions, and increasing geopolitical tensions in Middle East.

Although geopolitical tensions, supply outages and Iranian sanctions were the main catalysts behind the price surge on Tuesday, Hurricane Florence and its possible impact on supply helped the price action as well. It is unclear how much Hurricane Florence will affect the supply as it makes landfall later this week in North and South Carolina. It is also possible that the hurricane will impact demand in the region as it makes landfall.

The boost in prices was also caused by rising geopolitical tensions in Iraq and Libya. Rioters burned down several buildings in Basra, a major city in Southern Iraq where the country produces significant amount of crude. The rising tensions in Iraq increased the supply shortage worries as Iraq is a major OPEC producer. The risk with Libya’s oil production volatility also increased as gunmen attacked the country’s national oil company killing two people and injuring nearly a dozen others. Libya’s oil production has been unstable as the country constantly faces riots and attacks. Libya’s oil production has been recovering, however the latest attack on Monday once again raised the skepticism around the stability of production from the country and increased bullish sentiment.

The increasing geopolitical tensions added more risk to a supply shortage scenario as the market expects further declines from Venezuela and Iran as November 4 approaches. The US sanctions on Iranian crude already squeezed some of Iran’s exports as the country’s exports to the Asian market have declined. The US government had told its allies to reduce Iranian exports, and some Asian buyers seem to be falling in line. Although Iranian sanctions are showing some early signs affecting countries exports levels, the true impact of how much supply will be lost will not be determined until US announces the 2nd round of sanctions, which is due on November 4.

The bullish sentiment in the market is certainly increasing with rising geopolitical tensions, declining Venezuelan production and approaching Iranian sanctions. However, the on-going US-China trade wars and worries around a weaker global economy and demand growth will be working against any significant price gains. Continuously increasing US production will be another bearish factor that will keep a lid on prices, in addition to the gloomier demand outlook.

The market remains with a bullish bias, but the failure of prices to break above and maintain the $71/Bbl level suggests that the risks associated with possible tariffs may pressure prices back to the key support areas associated with the 200-day moving average at $65.31/Bbl. This commonly watched indicator is rising and is starting to narrow the trade range for WTI. Any breakdown and daily close below this key support will remove the bullish bias from the market and will likely force some liquidation by the speculative longs. However, this notable average has held the bull market for a year now and is expected to continue to hold. Should prices test this level again and it holds, prices will likely head back to the high end of the range at $71/Bbl. At that point, the market will need additional news for an extension beyond that level and onward to the June highs at $75/Bbl. A breakdown below the key average will likely take prices down to the April lows around $62/Bbl. Some elements to the trade that will continue are the volatility and daily headline risks along with short-term supply outages due to rising geopolitical tensions. As the market understands the fundamental impacts of sanctions and tariffs later this year, prices will start to consolidate into a lower range. The quota easement, continued US growth, and fears of a weaker demand growth lead Drillinginfo to believe this range to be $58/Bbl-$65/Bbl for an extended period of time.

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