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US crude oil stocks decreased 12.6 MMBbl last week. Gasoline inventories decreased 0.7 MMBbl, while distillate inventories increased 4.1 MMBbl. Yesterday afternoon, API reported a large crude oil draw of 6.79 MMBbl, alongside a gasoline draw of 1.59 MMBbl and a distillate build of 1.96 MMBbl. Analysts were expecting a smaller crude oil draw of 4.49 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted a large withdrawal of 7.2 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 29 MBbl/d from last week, per EIA. Crude oil imports were down 1.6 MMBbl/d last week, to an average of 7.4 MMBbl/d. Refinery inputs averaged 17.7 MMBbl/d (1 MBbl/d less than last week), leading to a utilization rate of 96.7%. The report is bullish due to significantly large crude oil and total petroleum stocks withdrawal. However, news that Libya is indicating it will slowly resume export activities as well as escalating US-China trade wars is working against the bullish sentiment. Prompt-month WTI was trading down $1.84/Bbl, at $72.27/Bbl at the time of writing.

WTI prices traded in the $72-$74/Bbl range last week. Prices have been trading around their three-year highs since the Trump administration demanded that all countries cut their Iranian oil imports to zero by November as well as terminally declining Venezuelan production.

In addition to sanctions on Iranian crude and declining Venezuelan production, supply outages from major producing countries increased concerns over a possible supply shortage in the market. Libya’s production fell to nearly 500 MBbl/d from its high of 1.28 MMBbl/d in February following oil port closures, while Canada’s output is down nearly 360 MBbl/d due to outages in oil sands facilities. In addition to outages in Libya and Canada, recent news from Norway increased the bullish sentiment further as hundreds of workers from Equinor (formerly known as Statoil) opted for a labor strike, asking for higher wages.

As short-term supply outages, sanctions on Iranian crude, and declining Venezuelan production have created the perfect storm in supporting prices, the recent production increases from Saudi Arabia and Russia following the latest OPEC meeting and continuously increasing US production are keeping a lid on further substantial price gains. Saudi Arabia had already ramped up production by 0.5 MMBbl/d in June, while Russia over the weekend announced an increase of production to 11.1 MMBbl/d for the first four days of July. Increasing trade tensions between US-China also pressuring prices as the situation threatens the global economic growth and demand.

Although the production gains from Saudi Arabia and Russia are significant and US production continues to increase, the market is unsure whether these additional barrels would be enough to offset the supply outages and declining production in Venezuela. Another catalyst in the market’s bullish stance is whether there is enough spare capacity to offset a substantial decline in supply levels if sanctions on Iranian crude materialize at higher levels than anticipated with participation of other countries. However, in the scenario that Iranian sanctions materialize only at modest levels and temporary supply outages are short-lived, sentiment can turn bearish and put significant pressure on prices.

With prices for WTI testing and failing at a new high ($75.27/Bbl) and then trading below the previous week’s low, the market may be in the process of developing a tradable resistance zone. Should a “blow off” top event come to fruition, the November 2014 price ($77.02/Bbl) may be the target. If there is a move to the downside, there is not a lot of support between last week’s low ($72.14/Bbl) and $70.56/Bbl. Until the market can understand what the quota easement will likely mean and Iranian sanctions materialize, WTI prices will remain volatile, especially with traders coming back from a holiday week and the market digesting the recent news. Eventually, after the volatility recedes and consolidation commences, the quota easement and continued US growth lead Drillinginfo to believe that the supply and demand for crude may force a retracement of prices to the mid-$60/Bbl level.

Petroleum Stocks Chart

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