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A Bearish Build

US crude oil stocks decreased by 1.5 MMBbl last week. Gasoline and distillate stocks posted withdrawals of 2.5 MMBbl and 0.2 MMBbl respectively. Yesterday afternoon, API had reported a surprise crude oil build of 1.8 MMBbl while reporting gasoline and distillate drawdowns of 4.8 MMBbl and 1.2 MMBbl. respectively. Analysts, however had expected a crude withdrawal of 2.8 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted a build of 1.1 MMBbl. For a summary of the crude oil and petroleum product stock movements, see table below.

US production was estimated to be up 20 MBbl/d from last week per EIA’s estimate. Lower 48 production was reported to be up 25 MBbl/d, while Alaska posted a decline of 5 MBbl/d. Imports were up by 209 MBbl/d last week to an average of 8.3 MMBbl/d. Refinery inputs averaged 17.4 MMBbl/d (123 MBbl/d more than last week), leading to a utilization rate of 95.4%. The report is bearish due to a smaller than anticipated crude withdrawal, as well the build in total stocks. WTI prices are down $0.27/Bbl to $48.89/Bbl at the time of writing.

Crude prices have been trading in the $48-51/Bbl range. Prices briefly pierced the $50/Bbl mark on Monday with bullish news from the OPEC meeting continuing to resonate. The possibility of the US imposing crude oil related sanctions on Venezuela added to the bullish sentiment. Sanctions could target crude oil imports from Venezuela (currently 720 Mbl/d) or barring PDVSA from doing financial business with US dollars, which would effectively bar exports of refined products from their refineries in the US. The sanctions would create short term volatility in prices. See Drillinginfo’s blog regarding ‘Vendemonium’ here:

The two-month high for prices achieved earlier this week was short lived, as a Reuters survey reported OPEC crude output had risen in July by 90 MBbl/d to 33 MMBbl/d, a 2017 high. The increase was mainly led by Libya, who remain exempt from the quotas. Iraq also contributed to the increase in output. The global demand numbers from IEA and the eagerness of Saudi Arabia to make the cuts a success will continue to bring out the bulls and set a floor for prices. However, there are still bearish factors in the form of rising OPEC and US production. Prices around the $50/Bbl level could lead to further hedging by US producers, placing a lid on prices.

Some OPEC and non-OPEC producers will be meeting on August 7-8th in Abu Dhabi to discuss how the group can increase compliance to balance global inventory levels. The anticipation of the outcome of this meeting could create some short-term volatility in prices. As stated here previously, without continued high compliance with production quotas and concurrent realization of the demand growth projected by IEA, there is little chance for the inventory normalization. Without inventory normalization, there can be no sustained price recovery. Recent price action has now expanded the range for WTI prices. The midterm low will likely be $42/Bbl (June and November 2016 low). Trade in the coming weeks will likely confirm the top of the new range ($50-$51/Bbl) and has redefined the low side of the range to $44/Bbl. As previously written, Drillinginfo has been expecting volatile trade and this will continue as the market gains confidence with regards to the pace of inventory normalization. The potential for tests of $39/Bbl has become remote and Drillinginfo expects the primary range in the mid- to high-$40/Bbl to hold the near-term trade.

Please find the updated Drillinginfo charts on the link below:
Petroleum Stock Report

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Sarp is VP of Commercial Product at Enverus. He has research and modeling experience in the upstream, downstream and power markets and has presented his work at various academic conferences around the world, including those organized by the SPE and the IAEE. He has also been published in the SPE Economics & Management Journal for his work on the long-term economic viability of production from unconventional liquids-rich reservoirs. Sarp’s focus on data-driven modeling and his ability to incorporate the effects of technological and market advances into analyses provides clients a thorough picture of the present and the future in their area of interest within the oil and gas industry. Sarp holds a Master of Science in Mineral and Energy Economics from the Colorado School of Mines, a Master of Science in Petroleum Economics and Management from the Institut Francais du Petrole (IFP School), and a Bachelor of Arts in Economics from the University of Chicago.