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US crude oil stocks posted a large decrease of 7.3 MMBbl last week. Gasoline and distillate inventories increased 1.7 MMBbl and 3.8 MMBbl, respectively. This week, API reported a crude oil build of 5.36 MMBbl alongside gasoline and distillate builds of 3.61 MMBbl and 4.32 MMBbl, respectively. Analysts were expecting a smaller crude oil build of 2.27 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted a sizeable decrease of 8.3 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 EIA. Crude oil imports were down 943 MBbl/d last week, to an average of 7.2 MMBbl/d. Refinery inputs averaged 17.5 MMBbl/d (66 MBbl/d less than last week), leading to a utilization rate of 95.5%. The report is bullish due to the large draws in crude oil and total petroleum stocks. However,  prices are being pressured by growing concerns if OPEC can agree on aggressive supply cuts, as the group concluded the meeting in Vienna without a final decision. OPEC delayed the decision on supply cuts until after it meets with other producers on Friday. Prompt-month WTI was trading down $2.30/Bbl, at $50.59/Bbl at the time of writing.

Prices found some support following the G20 meeting and in anticipation of the upcoming OPEC meeting and traded in the $52/Bbl-$54/Bbl range last week.

Prices rose nearly 4 percent on Monday as optimism about a potential supply cut by OPEC and Russia increased following the G20 meeting. Russian President Vladimir Putin said he and Saudi Crown Prince Mohammed Bin Salman agreed to extend the output cuts. The meeting between US President Donald Trump and Chinese President XI Jinping during the G20 meeting also gave some support to prices, as an agreement was reached to halt new tariffs for 90 days that were to be implemented on Jan.1, while the trade talks continue. In addition to bullish news about supply cuts and easing of trade tensions, a surprise announcement by Alberta Premier Rachel Notley, who ordered oil companies in the Canadian province to reduce supply levels by nearly 9 % next year, also gave a boost to prices.

The news from the G20 meeting certainly increased the bullish sentiment in terms of production cuts and trade disputes. Although statements by Russian and Saudi officials point to a decision in favor of supply cuts, a final decision will be made during the OPEC meeting. Russia’s previous stance on supply cuts until the G20 meeting and remarks by Iran’s OPEC governor Hossein Kazempour Ardebili are keeping the market cautious ahead of the OPEC meeting. Kazempour said there were tensions between members of the cartel, with some unhappy about others’ large production increases in recent months. He also stated that even if an agreement is reached, some members will not join it. Also increasing the skepticism about a sizeable supply cut agreement, led by Saudi Arabia, is the decision by Donald Trump to refrain from acting against Saudi Arabi over the assassination of the journalist Jamal Khashoggi and possibly to use this as leverage to convince the Kingdom either not to cut supply or to keep cuts as low as possible.

Although recent news has increased the bullish sentiment, the fundamentals remain the same and point to supply overhang moving into 2019, as the world’s top three producers (Russia, the US, and Saudi Arabia) are all producing at record levels and demand growth projections remain weak. In order for supply overhang to reverse course, OPEC will need to agree on sizeable production cuts and execute on them, while demand for oil products need to increase.

Even with the small weekly rise in prices, the market remains oversold. The close on Friday has prices beyond two standard deviations below the 20-week moving average. The weekly momentum indicator is oversold to levels not seen since the declines of August 2015. Open interest in the WTI market continues to decline, while the volume showed a slight gain on the week. The market is due for a countertrend rally to alleviate the pressure from the seven-week liquidation. If last week’s gains and the bullish news provide a base for a countertrend rally, price action should become volatile and could take prices potentially up to $57.44/Bbl, especially if the results of the OPEC meeting point to a significant supply reduction. Drillinginfo continues to believe the long-term range for prices will occur between $60/Bbl and $65/Bbl for an extended period. However, the market may trade within the range of $51/Bbl-$61/Bbl in the near term as the market assesses the potential supply changes coming up.

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