US crude oil stocks increased 8.0 MMBbl last week. Gasoline and distillate inventories decreased 0.5 MMBbl and 1.8, respectively. Yesterday afternoon, API reported a crude oil build of 0.9 MMBbl, while reporting gasoline and distillate draws of 1.7 MMBbl and 1.2 MMBbl, respectively. Analysts were expecting a crude oil build of 1.1 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted an increase of 8.0 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.
US crude oil production maintained same levels from last week, per EIA. Crude oil imports were up 163 MBbl/d last week, to an average of 8.0 MMBbl/d. Refinery inputs averaged 16.6 MMBbl/d (77 MBbl/d more than last week), leading to a utilization rate of 90.4%. The report is bearish, as both crude oil and total petroleum stocks posted significant builds. Although inventory levels increased, prices continue their rise due to anticipation on Iranian sanctions. Prompt-month WTI was trading up $0.29/Bbl, at $75.52/Bbl at the time of writing.
Prices have been inching higher and trading above $70/Bbl, as they pierced through $75/Bbl. The strength in prices has been increasing as Iranian sanctions approach and the market’s skepticism whether OPEC can and will interfere and offset the supply declines increases.
Bullish sentiment increased further with a Reuters poll showing that Iranian production declined in September. The market’s bullish stance has been increasing as Iran exports have been showing signs of declines, and as other countries such as India and China are starting to reduce their export levels, complying with the US government’s call to allies to reduce export levels from Iran. Supporting prices further was the deal announced between US-Canada-Mexico. The countries have made a deal to salvage the North American Free Trade Agreement (NAFTA). The trilateral pact between the countries alleviated some of the concerns around trade disputes affecting overall economic growth and demand for crude-related products.
As the market takes a very bullish stance regarding the latest developments, with NAFTA being salvaged and Iran production showing signs of declines ahead of the 2nd round of sanctions, there still remain some bearish factors and risk of a possible price correction given the continuous production growth from US and ongoing US-China trade disputes. In the scenario that Iranian production does not decline as much as the market is anticipating, these two bearish factors could cause a sentiment shift especially if US-China trade war escalates further, impacting overall global economy and demand growth crude products. The decision to release and sell 11 MMBbl of crude from the Strategic Petroleum Reserve (SPR) could also pressure prices further if Iranian sanctions do not materialize at the expected levels.
Prices continued to increase throughout the week as they closed the week at $73.25 and broke the $75/Bbl beginning of this week. The end of the week left prices nearing overbought levels on the momentum indicators but, more importantly, the gains were met on much lower volume as the week moved along. Perhaps this reflects concern about how high the run will take prices, but the market seems to be indicating testing new highs as $75/Bbl was reached. Any actions from the Trump administration or changes in the position of Saudi Arabia could bring a drastic correction to the recent run. The potential for volatility has risen with this price run and will continue until the market develops a less speculative and more fundamentally driven assessment. The large range in prices since July has the high at $75.27 and the low end of the range at the 200-day moving average (currently at $66.29 and rising). When all the issues settle and the uncertainty diminishes, prices are likely to consolidate into a lower range. The continued US production growth and the fears of weaker demand growth lead Drillinginfo to believe the long-term range will occur between $58/Bbl-$65/Bbl for an extended period of time.
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