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US crude oil stocks increased 6.0 MMBbl last week. Gasoline inventories increased 1.0 MMBbl, while distillate inventories declined 2.7 MMBbl. Yesterday afternoon, API reported a large crude oil build of 9.75 MMBbl, alongside a gasoline build of 3.4 MMBbl and a distillate draw of 3.5 MMBbl. Analysts were expecting a smaller crude oil build of 2.62 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted a significantly large increase of 11.3 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.

US crude oil production increased 100 MBbl/d last week, per EIA. Crude oil imports were down 568 MBbl/d last week, to an average of 7.4 MMBbl/d. Refinery inputs averaged 16.2 MMBbl/d (352 MBbl/d less than last week), leading to a utilization rate of 88.8%. The report is bearish, as both crude oil and total petroleum stocks posted significant builds. The bearish inventory report as well as OPEC’s production increasing despite of declining Iran and Venezuelan supply levels have pushed prices down. Prompt-month WTI was trading down $1.44/Bbl, at $71.73/Bbl at the time of writing.

Prices have retracted some of their gains after reaching a high of $76.41 last week and have been trading in the $73.00/Bbl to 75.00/Bbl range. Prices were being pulled in both directions with increasing bullish and bearish headlines and events last week, and it seems like prices will be in highly volatile environment at least in the near term until Iranian sanctions and OPEC’s reaction to offset possible Iranian declines materialize.

Prices started the week lower as market took advantage of high prices and took profits. Monday was a busy day in terms of headlines, as the Trump administration suggested that US could soften sanctions on Iran by giving waivers to some countries that have pledged to reduce their Iranian imports. India could be one of these countries that may keep importing Iranian crude. The remarks by the Trump administration and India as well as possibly other countries continuation of Iranian crude imports have increased the skepticism around the true impact of Iranian sanctions to the supply levels. Pressure on prices increased further due to Saudi Arabia and Russia increasing production. Saudi Arabia stated that the country could replace Iranian crude while noting that they will be increasing production to a record level of 10.7 MMBbl/d next month. Russia on the other hand has reversed its production cuts and increased production to record levels as wells. These two countries increasing production as well as US producers not showing signs of slowing down will pressure prices further and could shift the bullish sentiment that has been building in the market to bearish quickly, especially if Iranian sanctions have a smaller effect on overall global supply levels than what the market is anticipating.

Although there are some headlines supporting the bearish sentiment, market bias remains bullish as Iranian sanctions approach. Although Iranian sanctions are set to be put place in November, the Iranian export figures are the main catalyst that is supporting the bullish bias. The Iranian exports have fell to 1.1 MMBbl/d in October according to a Reuters report, versus 1.6 MMBbl/d in September and 2.5 MMBbl/d in April.  Prices saw further support this week as China’s economic stimulus gave some hope to the market that it would help countries’ economic growth and demand for crude products, however the trade dispute between US and China is still a big threat to prices moving forward. Another bullish factor that supported prices in the beginning of the week was Hurricane Michael. On Tuesday, the Bureau of Safety and Environmental Enforcement reported that nearly 40% of oil and 28% of natural gas production in the Gulf – of – Mexico was shut-in, and numerous platforms were evacuated in the anticipation of Hurricane Michael. However, prices gave up some of their gains as the hurricane did not impact any production zones when it made it landfall and could potentially impact demand rather than supply in the region.

Market sentiment could remain bullish for a while with the anticipation of Iranian sanctions and lower export figures from the country, while Venezuelan production could post further declines. The true effect of Iranian sanctions is still unclear, and any significant price gains may be limited with OPEC and Russia production levels increasing as well as the ongoing US-China trade dispute that could be detrimental to the overall health of global economy and demand growth.

Prices continued gains throughout the early part of last week, reaching a high of $76.41/Bbl despite the bearish inventory release. From there, some participants took profits and prices softened, but the week still closed higher than the early July 2018 highs. Market internals were stronger last week, as volume increased as prices increased. However, total open interest declined as the prices ran, signaling profit-taking. With the recent extension higher despite some bearish indicators, the potential for volatility has risen, especially if some of the speculative fervor wanes. Price gains should continue to be expected, but this run may end similar to the July 2018 run with a potentially violent correction. The large range in prices since July 2018 has now been extended above $76/Bbl and the low end of the range, the 200-day moving average, is now at $66.82/Bbl. The intermediate support sits at $71/Bbl. When the fundamentals regarding inventory despite the sanctions start to show in the data, crude prices are likely to consolidate into a lower range before the end of the year.

The continued US production growth and the fears of weaker demand growth lead Drillinginfo to believe the long-term range will occur between $60/Bbl-$65/Bbl for an extended period of time.

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