US crude oil stocks decreased 4.3 MMBbl last week. Gasoline and distillate inventories increased 1.8 MMBbl and 3.1 MMBbl, respectively. Yesterday afternoon, API reported a crude oil draw of 1.17 MMBbl, alongside gasoline and distillate builds of 1.0 MBbl and 1.8 MMBbl, respectively. Analysts were expecting a crude oil draw of 1.29 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted an increase of 3.6 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 84 MBbl/d from last week, per EIA. Crude oil imports were up 230 MBbl/d last week, to an average of 7.7 MMBbl/d. Refinery inputs averaged 17.6 MMBbl/d (81 MBbl/d more than last week), leading to a utilization rate of 96.6%. Although crude oil withdrawal was higher-than-expected, the build in total petroleum stocks and expectation of US-China trade dispute further escalating with another round of tariffs on $200 billion worth of Chinese goods have pushed prices down. Prompt-month WTI was trading down $1.47/Bbl, at $67.25/Bbl at the time of writing.
Prices traded in the $68/Bbl to $70/Bbl range last week. Prices had a volatile week as they mainly traded on speculative bullish and bearish headlines. Although prices had a strong start to the week, they gave up their losses to fall lowest levels in about a week.
Prices were buoyed on Tuesday with increasing supply worries as some offshore production was shut off due to anticipated damage from Tropical Storm Gordon. However, the price action due to the storm was short-lived, and prices gave up their gains as the storm weakened and moved away from the production areas.
Although Tropical Storm Gordon and possible loss of production from the Gulf of Mexico was the main headline for bullish sentiment earlier in the week, Iranian export levels and the upcoming sanctions in November are still the main catalyst supporting prices and keeping the bias bullish. Iranian exports are already showing signs of rapid declines. However, it is still unclear what the true impact will be when the sanctions are announced in November.
The market seems to still have a bullish bias, mainly due to declining production from Venezuela and Iranian sanctions causing a supply disruption. However, sentiment could shift quickly, as there are numerous factors that could threaten prices – especially if the impact from Iranian sanctions is not as drastic as the market is expecting. One of the biggest threats to prices is the ongoing US-China trade wars, which could get worse, as the public comment period on the next round of sanctions is closing and President Donald Trump seems to be leaning toward the implementation of $200 billion of tariffs on Chinese goods. The crisis in Turkey is still causing fears on the global market, as turmoil may spread and emerge in other economies. Both of these factors tremendously affect the overall health of the global economy and growth as well as demand growth. Prices will continue to be pressured, with the possibility of a weakening economic growth and weaker demand.
Continuously increasing US production is another bearish factor that will keep a lid on prices. Producers are taking advantage of higher pricing as they strengthen their balance sheets and, complete more efficient wells while building DUCs to prepare for further ramp-up when additional takeaway capacity is available. Saudi Aramco calling off the IPO could also be another threat to prices, as Saudi Arabia may now not be as interested in keeping prices higher – especially in a time when they have already starting increasing production along with Russia.
The market still has a bullish bias, as the test of the 200-day moving average failed and, as expected, the rebound has now taken prices to the high end of the recent range ($64.43/Bbl-$71.10/Bbl). This notable moving average (now trading at $65.06/Bbl) has held the bull market for a year now. This average will hold near-term declines. However, should this average break down, a significant amount of selling will damage the long-term bias, and declines can take prices down to the April lows around $62/Bbl. Last week’s continued rebound off of the test of the average took prices over $70/Bbl briefly, only to retrace at the end of the week. Expect the high end of the recent range to be tested early this week. However, until the supply and demand fundamentals are well understood, there will be hesitation to take prices too high. One element to the trade that will continue is the volatility and daily headline risk. As the market resolves this uncertainty later in the year, volatility will recede and prices will start to consolidate in 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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