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Insights across the energy value chain

US crude oil stocks decreased by 3.4 MMBbl last week. Gasoline and distillate stocks increased by 3.6 MMBbl/d and 2.7 MMBbl/d respectively. Yesterday afternoon, API had reported a crude oil build of 1.8 MMBbl, alongside a gasoline withdrawal of 1.5 MMBbl and distillate build of 2.7 MMBbl. Analysts, on the contrary were expecting a crude withdrawal of 3.2 MMBbl. The most important number to keep an eye on, total petroleum inventories posted a large withdrawal of 7.6 MMBbl. For a summary of the crude oil and petroleum product stock movements, see table below.

US production was estimated to be up 24 MBbl/d from last week per EIA’s estimate. Lower 48 and Alaska production increased by 20 MBbl/d and 4 MBbl/d respectively. Imports decreased by 544 MBbl/d last week to an average of 7.3 MMBbl/d. Refinery inputs averaged 17.0 MMBbl/d (165 MBbl/d more than last week), leading to a utilization rate of 92.6%. The report is bullish due to withdrawal in crude oil and total petroleum stocks. Although the EIA report is bullish, prices are down on anticipation of the OPEC meeting and Russia’s impact on the outcome, with prompt month WTI trading down $0.61/Bbl at $57.38/Bbl.

Prices traded in the $57-$59/Bbl range last week, reaching a two-year high of $59/bbl on Friday following supply concerns with TransCanada shutting down the Keystone pipeline. Prices have been retreating from their highs with a cautious market ahead of the OPEC meeting and with the US rig count rising for third week in a row. Tuesday, prices slipped further as API reported a build in crude oil inventories and TransCanada announced that Keystone pipeline has restarted operations. The pipeline will be operating under reduced pressure for some time.

OPEC will be meeting tomorrow in Vienna to discuss the faith of supply cuts. The group will be going in to the meeting in a higher price environment. However, the last seven week’s price gains have been spearheaded by the increased speculative trading on geopolitical issues in Middle-East and a firm expectation of OPEC extending the supply cuts. Although OPEC has been successful in terms of cutting supply and keeping compliance levels high, higher production from the US and non-OPEC producers are indications that OPEC will need to extend or deepen the cuts if they want inventory levels to normalize and a sustainable higher price environment.

As OPEC members are getting ready to meet tomorrow, the market is expecting OPEC to announce an extension of the cuts through the end of 2018. However, Russia’s unwillingness to join the possible extension is causing some skepticism around the outcome. The prices will be in a vulnerable state if OPEC cannot convince member countries and Russia to a nine-month supply cut extension. Any outcome except a nine-month extension will be interpreted as bearish news and will cause a major sell off since the recent price rally was not supported by fundamentals. In the case of a nine-month extension announcement, the possible price rally may be short lived as higher prices will incentivize US producers to hedge production at higher prices and increase production rapidly in addition to the possibility of higher Iraqi and Libyan production.

The market has now held over $52.00/Bbl for over a month, establishing that as the low end of the new range. It is still critical regardless of the outcome from the OPEC meeting, that high compliance with production quotas and the realization of the demand growth projected by the IEA will need to occur to reach the five-year average inventory levels. Without inventory normalization, the price recovery will not be sustained. Drillinginfo expects the trade to return to the previous range $52-$56/Bbl in the coming weeks as speculative sector starts taking gains and fundamentals start to settle back in.

Please find the updated Drillinginfo charts on the link below:
Petroleum Stocks Chart

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