US crude oil stocks posted a decrease of 4.8 MMBbl from last week. Gasoline and distillate inventories decreased by 2.4 MMBbl and 2.5 MMBbl, respectively. Yesterday afternoon, API reported a crude oil build of 0.4 MMBbl, while reporting gasoline and distillate draws of 0.88 MMBbl and 1.2 MMBbl, respectively. Analysts, to the contrary, were expecting a crude oil draw of 3.5 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted a decrease of 4.9 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.
US crude oil production decreased 100 MBbl/d last week, per the EIA. Crude oil imports were up 0.9 MMBbl/d last week, to an average of 6.9 MMBbl/d. Refinery inputs averaged 17.4 MMBbl/d (27 MBbl/d less than last week’s average), leading to a utilization rate of 94.8%. Prices extend gains due to larger than expected crude draw and total petroleum stocks withdrawal. Prompt-month WTI was trading up $1.18/Bbl, at $57.44/Bbl, at the time of writing.
Prices had a busy week and continued their volatility as the market kept its focus on the developments and news regarding the US-China trade tensions, global economic health and data, and eroding crude demand led by a weakening economic growth. Prices bounced up to their highest of the week last Thursday, only to give up most of their gains before the long weekend due to strengthening of the US dollar. The decline in prices continued as crude futures sank more than 2% on Tuesday, due to the US starting to impose 15% tariffs on some Chinese imports Sunday, while China began placing new duties on US crude oil. Also supporting bearish sentiment and bringing prices down was the US manufacturing data showing activity in August falling for the first time in three years and the lingering fears about a global recession.
Although the overall gloomy economic outlook and the ongoing trade war between the world’s largest economies still persists, the positive news from China’s services sector caused a surge in prices on Wednesday. Oil prices rose more than 4% on Wednesday along with global markets after a private survey showed that activity in China’s services sector grew at the fastest pace in three months in August. Also supporting prices was a possible sign of easing tensions from the Middle East, as Iran stated that Tehran would free seven crew members from the detained British-flagged tanker that was seized by Iran in retaliation for Britain’s previous detention of an Iranian tanker.
Despite the brief support provided by positive news from China’s services sector, the overall global economic outlook remains dim and troublesome as the trade tension between the US and China continues to linger and progressively worsen due to tit-for-tat tariffs imposed by both countries. The supply side unfortunately does not provide too much support to prices either, despite the historical low productions from Iran and Venezuela and the OPEC+ countries’ continuing efforts to reduce supply. OPEC is set to meet on September 12 in Abu Dhabi. Although the market is very much focused on the impact of the US-China trade war on the economy and oil demand, developments from this meeting will be closely watched, as the IEA has already given signals that without further supply reductions, an oil supply glut could resurface again in 2020.
The recent range between $53.00 and $58.00 may hold in the coming week without developments in the US and China trade war, while the long-term range between $50.00 and $61.00 will likely hold without similar developments. China’s attempt to bring tariffs on US crude imports may indicate a shift to utilize Iranian imports. Prices would be pressured if Iran were to increase output because of demand from China or a nuclear deal with France. The market will trade around the news event or Twitter feeds in the coming week, but also will keep an eye out for any news regarding supply cuts from the OPEC meeting.
Petroleum Stocks Chart
Natural gas storage inventories increased 60 Bcf for the week ending August 23, according to the EIA’s weekly report. This is spot on with the market expectation, which was an injection of 60 Bcf.
Working gas storage inventories now sit at 2.857 Tcf, which is 363 Bcf above inventories from the same time last year and 100 Bcf below the five-year average.
At the time of writing, the October 2019 contract was trading at $2.275/MMBtu, roughly $0.053 higher than yesterday’s close. The September 2019 contract expired yesterday, rallying to close at $2.251/MMBtu, up $0.049 from the prior day’s close.
Hurricane Dorian is headed toward the lower 48, but recent forecasts for the storm show that it is expected to hit the eastern part of Florida and stay away from the Gulf. With this current path, production isn’t expected to be impacted. However, should the forecasted path take a turn toward the Gulf, crews will be evacuated, and production will decrease for a short period of time. This path change must happen soon for production to be impacted, as Dorian is expected to hit the eastern coast of Florida this weekend. Additionally, should the hurricane path stay true, production will stay near current levels and demand will decrease, pressuring prices lower.
See the chart below for the projections of the end-of-season storage inventories as of November 1, the end of the injection season.
This Week in Fundamentals
The summary below is based on Bloomberg’s flow data and DI analysis for the week ending August 29, 2019.
- Dry production decreased 0.30 Bcf/d on the week. Most of the decrease came from the South Central (-0.44 Bcf/d), where Texas production dropped 0.23 Bcf/d and GoM production fell 0.11 Bcf/d. To slightly offset the decrease, the East region gained 0.12 Bcf/d.
- Canadian imports decreased 0.64 Bcf/d, largely due to decreased imports in the Midwest.
- Domestic natural gas demand fell 5.24 Bcf/d week over week. Power demand saw the largest decrease, falling 5.03 Bcf/d, which accounts for nearly the entire decrease in domestic demand. Res/Com demand fell 0.41 Bcf/d, while Industrial demand gained 0.21 Bcf/d on the week.
- LNG exports gained 1.39 Bcf/d, mainly due to Sabine and Corpus ramping back up to full export capacity. Mexican exports remained relatively flat on the week, gaining only 0.01 Bcf/d.
Total supply decreased 0.93 Bcf/d, while total demand decreased 4.01 Bcf/d week over week. With the drop in demand outpacing the drop in supply, expect the EIA to report a stronger injection next week. The ICE Financial Weekly Index report is currently expecting an injection of 80 Bcf. Last year, the same week saw an injection of 62 Bcf; the five-year average is an injection of 63 Bcf.
US crude oil stocks posted a very large decrease of 10.0 MMBbl from last week. Gasoline and distillate inventories both decreased by 2.1 MMBbl. Yesterday afternoon, API reported a very large crude oil draw of 11.1 MMBbl, while reporting gasoline and distillate draws of 0.35 MMBbl and 2.5 MMBbl, respectively. Analysts were expecting a much smaller crude oil draw of 2.1 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted a significantly large decrease of 11.2 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.
US crude oil production increased 200 MBbl/d last week, per the EIA. Crude oil imports were down 1.3 MMBbl/d last week, to an average of 5.9 MMBbl/d. Refinery inputs averaged 17.4 MMBbl/d (0.3 MMBbl/d less than last week’s average), leading to a utilization rate of 95.2%. The report is bullish due to significantly large crude oil and total petroleum stocks withdrawals. The increase in prices yesterday due to API’s report continued today, following the bullish EIA report. Prompt-month WTI was trading up $1.06/Bbl, at $55.99/Bbl, at the time of writing.
Prices saw a sharp increase on Tuesday due to a significantly large crude oil draw reported by API and the expectation of a similar drop from today’s report by EIA. The sharp increase in prices came despite the news from the G7 summit where France’s president lifted hopes for a deal between the US and Iran, which could mean Iran ramping up production, and despite the concerns about a recession and uncertainty around the lingering US–China trade wars
The developments around the US–China trade war continue to drive price movements in both directions, and the sentiment on the issue is changing rather fast, although no resolution and no deal between the world’s two largest economies seem to be possible anytime soon. Prices in the last two weeks have swung in both directions on this issue. Prices got some support the previous week from US President Donald Trump’s statement that he would be talking with his Chinese counterpart to discuss trade issues. Prices were further bolstered by the US stating it would extend a reprieve that permits China’s Huawei Technologies to buy components from US companies. The bullish sentiment from this news was short-lived as China last Friday announced it would impose retaliatory tariffs on $75 billion worth of imports from the US, which include crude oil. This announcement was followed by President Trump’s twitter posts in which he said he said he would be imposing higher tariff rates on some Chinese imports.
Monday brought more volatility to prices due to uncertainty and confusion about the US–China trade dispute. Prices first moved higher as both the US and China made statements and appeared to be willing to ease the rising tensions – first, with Trump stating that China was seeking a trade deal and that US officials had received calls from Chinese negotiators to return to discussions, and second, comments by China’s trade negotiator, Vice President Liu He, saying that Beijing hopes to resolve the trade war through “calm” negotiations without escalating the tensions any further. The hopes for a possible round of discussions perhaps a trade deal increased the bullish sentiment; however, news that Beijing did not confirm the phone call mentioned by Trump between Chinese and US officials reversed the sentiment and once again increased the doubts and concerns over whether any progress will be made regarding the US–China trade disputes.
Prices have had trouble consistently trading above the $56/Bbl level in the last couple of weeks and market remains in the range of $50 to $58 as bearish sentiment is slowly taking over the market while tensions in Middle East prevents any significant decline in prices. At this point the only catalyst that could break the resistance and take prices close to the $60/Bbl range would be tensions in the Middle East drastically intensifying or a large reduction in output by OPEC. Prices can be further pressured in the near term if the US and Iran make any progress toward a deal and if US–China trade tensions worsen and further deteriorate global economic and demand growth. There also remains the possibility of China ignoring the bans on buying Iranian crude (in place of US crude) as a retaliatory posture, likely pressuring prices below $50. This event could flood the global crude market going into an already over-supplied 2020.
Petroleum Stocks Chart