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US crude oil stocks decreased by 5.6 MMBbl last week. Gasoline and distillate stocks increased by 6.8 MMBbl/d and 1.7 MMBbl/d respectively. Yesterday afternoon, API had reported a large crude oil draw of 5.5 MMBbl, alongside gasoline and distillate builds of 9.2 MMBbl and 4.3 MMBbl respectively. Analysts, were expecting a crude withdrawal of 3.5 MMBbl. The most important number to keep an eye on, total petroleum inventories posted a withdrawal of 2.5 MMBbl. For a summary of the crude oil and petroleum product stock movements, see table below.

US production was estimated to be up 25 MBbl/d from last week per EIA’s estimate. Lower 48 and Alaska production increased by 20 MBbl/d and 5 MBbl/d respectively. Imports decreased by 127 MBbl/d last week to an average of 7.2 MMBbl/d. Refinery inputs averaged 17.2 MMBbl/d (192 MBbl/d more than last week), leading to a utilization rate of 93.8%. The reaction to the report has been mixed, but the larger than expected crude withdrawal has not offset the bearish build in gasoline & distillates. Prompt month WTI was trading down $0.79/Bbl at $56.83/Bbl at the time of writing.

Prices traded in the $57-$59/Bbl range last week. Prices rose after the OPEC meeting but started giving up gains on Tuesday after the market started to take a skeptical stance on the continued success of the cuts and API reported a large product build.

The highly anticipated OPEC meeting took place last Thursday in Vienna. The results from the meeting were positive, which were aligned with the expectations of the market. OPEC, along with 10 other countries outside the group (including Russia) reached an agreement to extend the deal to collectively cut output by 1.8 MMBbl/d until the end of 2018. The deal was previously set to expire in March 2018. The agreement also left Nigeria and Libya (previously exempt from the cuts) with a combined 2.8 MMBbl/d output cap. Nigeria and Libya are expected to keep production within their highest levels in 2017 for the duration of the deal.

OPEC’s decision on extending the deal is certainly positive news, and will support prices. The quotas placed on Nigeria & Libya are certainly encouraging, given that these countries had undermined a large portion of the cuts by the 12 quota carrying OPEC members in 2017. Nigeria & Libya increased production by more than half of the pledged cuts last year and the new quotas are viewed as bullish for a market that was highly concerned with the potential growth from these two countries. OPEC will meet again in June 2018 to discuss and review the deal and start discussing an exit strategy and plans for 2019.

There is still a lot of length to bullish speculative bets in the market because of the positive OPEC meeting outcome and continuing geopolitical issues in the Middle East. This leaves the market open for a large profit-taking rally. A lack of bullish results from inventory reports in the coming weeks and the possibility of increasing US and non-OPEC production in this recent prematurely higher price environment can shift focus back to fundamentals and reverse sentiment quickly.

The market has now held over $52.00/Bbl for over a month, establishing that as the low end of the new range. 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 to normalize inventories back to levels from prior to the price crash. Without inventory normalization, the price recovery cannot be sustained. Drillinginfo expects the trade to return to the previous range $52-$56/Bbl in the coming weeks as the speculative sector starts taking gains and fundamentals start to settle back in.

Please find the updated Drillinginfo charts on the link below:

Petroleum Stocks Report

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Sarp Ozkan

Sarp Ozkan is a Manager, Energy Analytics for Drillinginfo providing to the modeling, research, and fundamental analysis efforts of the Market Intelligence group. He manages the production forecasting models and leads upstream and crude oil related consulting projects. While having a focus on data-driven modeling, his ability to incorporate the effects of technological and market advances into analysis provides clients a thorough picture of the present and the future in their area of interest within the oil & gas industry. His analysis has been presented at industry and academic conferences alike. Prior to joining Drillinginfo, Sarp was a Senior Energy Analyst with Ponderosa Energy. Sarp holds a MS Degree in Mineral & Energy Economics from the Colorado School of Mines, MS Degree in Petroleum Economics & Management from the Institut Francais du Petrole (IFP School), and a BA Degree in Economics from the University of Chicago.

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