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Insights across the energy value chain

US crude oil stocks decreased by 7.4 MMBbl last week. Gasoline and distillate stocks posted an increase of 4.8 MMBbl and 8.9 MMBbl respectively. Yesterday afternoon, API had reported a crude oil draw of 5.0 MMBbl, while reporting gasoline and distillate builds of 1.9 MMBbl and 4.3 MMBbl respectively. Analysts were expecting a crude withdrawal of 5.2 MMBbl. The most important number to keep an eye on, total petroleum inventories, reversed its recent trend of withdrawals and posted an increase of 1.2 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.

US production was estimated to be up 28 MBbl/d from last week per EIA’s estimate. Imports decreased 27 MBbl/d last week to an average of 8.0 MMBbl/d. Refinery inputs averaged 17.6 MMBbl/d (210 MBbl/d more than last week), leading to a utilization rate of 96.7%. The initial focus from the market was on the larger than expected crude oil withdrawal, but the more than offsetting product increases will likely overcome the bullish sentiment. Prompt month WTI was trading up $0.17/Bbl at $61.80/Bbl at the time of writing.  

WTI prices traded in the $59-$62/Bbl range last week. On Tuesday, prices reached their highest start to a calendar year since 2014 with WTI and Brent at $60.74/Bbl and $67.29/Bbl respectively. Prices started the year strong as speculative bullish bets increased due to the unrest in Iran caused by anti-government rallies. Prices rose further on Wednesday, reaching $61.63/Bbl (highest level since June 2015, and highest close since December 2014) after the API report showed another significant draw in crude inventories.

The anti-government protests in Iran (third largest OPEC producer) spurred concerns over a possible supply outage in the country. However, the protests have not impacted crude production.

As the market focused on the news out of Iran, some of the bearish news were ignored. The pipeline, carrying crude to the Es Sider port in Libya has restarted operations, which had reduced production by 70-100 MBbl/d last week. The 450 MBbl/d Forties pipeline has also resumed full operations. Rapidly increasing US production, quickly approaching 10 MMBbl/d is the most important fundamental element in the market that is currently being ignored amid the geopolitical unrest and OPEC compliance.

Recent price increases were a result of speculative long bets, which leaves the market open for a large profit-taking rally. Increasing US production or unfavorable inventory results in this fundamentally premature higher price environment can shift focus back to bearish factors quickly.

The market has now held over $55.00/Bbl for over a month, establishing the mid-$50/Bbl levels as the low end of the new range. Drillinginfo expects a more consolidative trading pattern in the coming weeks as speculative traders start to re-evaluate the fundamental supply and demand balance. While additional news regarding OPEC quotas, inventory normalization, or temporary supply disruptions due to geopolitical issues may provide short term gains and volatility, the promise of additional growth from US producers is likely to limit longer term extensions. It is still critical that continued high quota compliance through 2018 along with the realization of the demand growth projected by the IEA occur concurrently for the market to have any chance of normalizing inventories back to levels from prior to the price crash. Without inventory normalization, the price recovery cannot be sustained. Drillinginfo continues to expect the trade to return to the mid-$50/Bbl levels in the near term.

Please find the updated Drillinginfo charts on the link below:

Petroleum Stock Chart

 

 

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