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Insights across the energy value chain

US crude oil stocks posted an increase of 0.9 MMBbl from last week. Gasoline and distillate inventories decreased 2.2 MMBbl and 1.1 MMBbl, respectively. Yesterday afternoon, API reported a crude oil build of 2.1 MMBbl alongside gasoline and distillate builds of 2.2 MMBbl and 0.21 MMBbl, respectively. Analysts were expecting a larger crude oil build of 7.97 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted an increase of 6.7 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.

US crude oil production remained unchanged last week, per the EIA. Crude oil imports were down 1.1 MMBbl/d last week, to an average of 7.1 MMBbl/d. Refinery inputs averaged 16.5 MMBbl/d (586 MBbl/d less than last week), leading to a utilization rate of 90.1%. The less than anticipated crude oil build and decline in total petroleum stocks are supporting prices. Bullish sentiment is also supported by the sanctions on Venezuelan crude and Saudi Arabia pledging to reduce supply further than its quota levels. Prompt-month WTI was trading up $1.38/Bbl, at $54.69/Bbl, at the time of writing.

Prices traded in the $52/Bbl to $54/Bbl range last week. Prices are being pulled both directions as OPEC-led supply cuts and Venezuelan oil sanctions are increasing the bullish sentiment while weak fundamentals, due to supply overhang and global economic growth concerns, are keeping the pressure on prices.

The global economic slowdown concerns increased on Monday and pushed prices down as earnings from industrial firms in the US and China disappointed and were weaker than anticipated. The latest news increased the concerns that the world’s second-largest economy, China, is facing a serious slowdown in its economic growth, as last week Beijing reported that 2018 had the slowest economic growth seen in China in nearly 30 years. Also pressuring prices and limiting any significant gains are the ongoing US-China trade disputes. Projections for global economic and demand growth are already weak and could worsen if a deal between the US and China is not reached. Trade negotiations between the two countries will resume this week, with the hopes that a deal can be reached by the March 2 deadline.

Prices recovered their losses on Tuesday with bullish headlines hitting the market. The major headlines that increased bullish sentiment were the US sanctions on Venezuelan crude and Saudi Arabia announcing deeper cuts than their initial quota for the month of February. Following the political turmoil in Venezuela, the Trump administration last week told US energy companies that Venezuelan oil sanctions could be put in place if the situation worsens. On Tuesday, the US Treasury formally announced the decision to impose sanctions on Venezuelan state-owned oil firm PDVSA. The sanctions on Venezuelan crude may put as much as 0.5 MMBbl/d of crude at risk. The announcement by Saudi Energy Minister Khalid al-Falih also increased bullish sentiment. Khalid al-Falih said that the Kingdom is planning to reduce output to nearly 10.1 MMBbl/d during February from the original quota level, which was 10.3 MMBbl/d.

Sanctions on Venezuelan crude, deeper supply cuts by OPEC (led by Saudi Arabia), and temporary outages in Libya certainly have increased the bullish sentiment and will support prices. However, fundamentals still point to a supply overhang, due to plentiful supply and concerns that crude demand could stumble further amid an economic slowdown.

Prices in the near term will be volatile as the market assesses the OPEC supply cuts and waits for a resolution of the trade disputes between the US and China. If a deal can be reached between the countries to eliminate the currently proposed tariffs on Chinese goods or to prevent any additional tariffs, global economic and demand growth could tick upward, which could support higher prices. However, if a deal cannot be reached and the Chinese economy continues to suffer, along with other emerging economies, sentiment could shift to bearish again regardless of the OPEC and non-OPEC supply cuts pressuring prices further.

Prices in WTI settled the week slightly down as the market tested the highs from early December, just above $54.00/Bbl. This brief rally lacked the critical internal elements of increasing volume and open interest. The trade last week showed a consolidation phase of a market trying to discern the next directional bias rather than an accumulation of the market position. The CFTC report was not available for most of the week due to the government shutdown; therefore, the market is blind to the position structure among the sectors. With the shutdown ending, the market will get some definition as to the positioning of the traders in the coming weeks. The high end of the price range was tested last week, and prices may stay in the range from last November and December, between $49.00/Bbl and $54.55/Bbl. The market may probe higher after last week’s action, but the gains are unlikely to hold without key news regarding the tariff dilemma between the US and China.

Petroleum Stocks Chart

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