US crude oil stocks increased by 3.0 MMBbl last week. Gasoline inventories increased by 2.5 MMBbl, while distillate inventories posted a decline of 1.0 MMBbl. Yesterday afternoon, API reported a crude oil build of 0.9 MMBbl, while reporting a gasoline build of 1.9 MMBbl and a distillate draw of 1.4 MMBbl. Analysts were expecting a larger crude oil build of 2.1 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted an increase of 3.7 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 up 13 MBbl/d from last week, per EIA. Crude oil imports increased by 261 MBbl/d last week to an average of 7.3 MMBbl/d. Refinery inputs averaged 15.9 MMBbl/d (49 MBbl/d more than last week), leading to a utilization rate of 87.8%. The report is bearish, as the crude oil build was larger than expected and total petroleum stocks posted a sizable build. Prompt-month WTI was trading down $0.48/Bbl to $62.53/Bbl at the time of writing.
WTI prices traded in the $62/Bbl-$64/Bbl range last week. Prices started the week strong following Saudi Arabia’s energy minister Khalid Al-Falih’s comments on Saturday and a supply outage in Libya. However, prices gave up some of the gains due to the strengthening dollar and growing concerns over US crude supplies and production.
Prices have been under pressure since US production surpassed 10 MMBbl/d, and EIA warned the markets about the strength of US production growth and its possible effects on supply/demand levels. Following the steep declines in prices in previous weeks, Al-Falih went in front of the press quickly to assure the markets that Saudi Arabia and other producers will adhere to the quotas even if that causes a supply outage. Although Al-Falih’s comments supported prices initially, a stronger dollar and US production’s march toward being the largest in the world increased bearish sentiment and pressured prices.
As previously stated, it’s in the Saudis’ best interests to keep oil prices strong ahead of the IPO of Saudi Aramco. Anytime prices are pressured by fundamentals, OPEC and the Saudis utilize the press to fuel speculative price increases. This is what happened over the weekend as Al-Falih went in front of the press and announced that Saudi Arabian production in the first quarter of 2018 would be much lower than the amount allowed under the 2016 production cut agreement, with exports estimated to average 7 MMBbl/d. News from Libya also helped Al-Falih in supporting prices, as protests at the El Feel field caused a supply outage of 90 MBbl/d, affecting exports from Mellitah.
Prices will be pulled in both directions as Saudi’s intentions will increase prices by utilizing the press and causing speculation, while US producers will be taking advantage of the higher prices, increasing production further, and edging closer to having the largest market share in the world.
The market trading back into the key areas (either side of $61/Bbl) seems to indicate a new range for prices ($58/Bbl-$62/Bbl) in the near term. While additional news regarding OPEC quotas, inventory normalization, or temporary supply disruptions due to geopolitical issues might create short-term price gains and volatility, the promise of additional growth from US producers is likely to limit longer-term extensions. It is critical that high quota compliance continue through 2018 and that the demand growth projected by the IEA occur concurrently for the market to have any chance of normalizing inventories back to the levels they were at prior to the price crash. Without inventory normalization, the price recovery cannot be sustained. Drillinginfo expects prices to return to a less speculatively induced level, settling in a range around $55/Bbl.
Please find the updated Drillinginfo charts on the link below:
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