US crude oil stocks decreased by 4.9 MMBbl last week. Gasoline and distillate stocks posted an increase of 4.1 MMBbl and 4.3 MMBbl, respectively. Yesterday afternoon, API reported a significantly large crude oil draw of 11.2 MMBbl, while reporting gasoline and distillate builds of 4.4 MMBbl and 4.7 MMBbl, respectively. Analysts were expecting a more modest crude withdrawal of 4.0 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted a withdrawal of 5.5 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 down 293 MBbl/d (due to extreme cold weather conditions “bomb cyclone”) from last week per EIA’s estimate. Crude oil Imports decreased by 308 MBbl/d last week to an average of 7.7 MMBbl/d. Refinery inputs averaged 17.3 MMBbl/d (285 MBbl/d less than last week), leading to a utilization rate of 95.3%. The reaction to the report has been mixed, as bearish sentiment from smaller-than-expected crude withdrawal, and large builds in distillate and gasoline, are being slightly offset by the large drop in US production and total petroleum stocks withdrawal. Prompt-month WTI was trading up $0.34/Bbl at $63.30/Bbl at the time of writing.
WTI prices traded in the $61-$63/Bbl range last week. Prices hit their highest level in more than three years following the bullish API report, which showed the largest crude oil withdrawal since 1999.
Prices have been seeing support from increasing geopolitical unrest and tension in the Middle -East as well as an OPEC-led production cut extension and high compliance rate by the group. The anti-government protests in Iran, the third largest OPEC producer, continue to cause concerns over a possible supply outage in the country. The situation in Venezuela is also supporting prices and helping OPEC’s compliance levels. Venezuela’s crude production has been on a steep decline, and is expected to fall further as the country’s economic crisis worsens by day.
Although the high compliance rate by OPEC is on track to normalize the inventory levels, rapidly increasing US production still poses a huge threat to inventory normalization. In its latest report, EIA raised its world oil demand growth for 2018 by 100 MBbl/d which is a good sign for inventory normalization. However, in the same report EIA also stated that US production could average 10.3 MMBbl/d in 2018, which would be the highest annual average production in US history. If the recent price rally continues and materializes, US producers will be motivated to grow production further and faster. In that scenario, the US will be edging closer to surpassing Saudi Arabia and Russia which would result in the US having the largest crude oil market share in the world.
Recent price increases mainly have been a result of speculative long bets, which leaves the market open for a large profit-taking rally. Any unfavorable inventory results, lower OPEC compliance rates, and the US edging closer to historically high production levels could shift focus back to bearish factors quickly in this fundamentally premature higher price environment.
The market has now held over $55/Bbl for more than a month, establishing the mid-$50/Bbl levels as the low end of the new range. Drillinginfo expects a more consolidative trading pattern in the coming weeks as speculative traders start to re-evaluate the fundamental supply and demand balance. While additional news regarding OPEC quotas, inventory normalization, or temporary supply disruptions due to geopolitical issues may provide short-term gains and volatility, the promise of additional growth from US producers is likely to limit longer-term extensions. 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 of normalizing inventories back to levels prior to the price crash. Without inventory normalization, the price recovery cannot be sustained. Drillinginfo continues to expect the trade to return to the mid-$50/Bbl levels in the near term.
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