US crude oil stocks increased by 1.9 MMBbl last week. Gasoline stocks posted a build of 0.9 MMBbl, while distillate inventories declined by 0.8 MMBbl. Yesterday afternoon, API had reported a surprise crude oil build of 6.5 MMBbl, alongside a gasoline build of 2.4 MMBbl and distillate withdrawal of 2.5 MMBbl. Analysts, on the contrary were expecting a crude withdrawal of 1.4 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted a build of 2.8 MMBbl. For a summary of the crude oil and petroleum product stock movements, see table below.
US production was estimated to be up 25 MBbl/d from last week per EIA’s estimate. Lower 48 production increased 20 MBbl/d while Alaska production increased 5 MBbl/d. Imports increased by 521 MBbl/d last week to an average of 7.9 MMBbl/d. Refinery inputs averaged 16.6 MMBbl/d (334 MBbl/d more than last week), leading to a utilization rate of 91.0%. The report is bearish due to the build in crude oil and total petroleum stocks. Prices are down, with prompt month WTI trading down $0.38/Bbl at $55.32/Bbl.
Prices traded in the $55-$57/Bbl range last week starting in their recent upper range of $57/Bbl until Monday, amid continuing geopolitical tensions in Middle East, surprise purge in Saudi Arabia, and supply cut extension expectations from the OPEC meeting. On Tuesday, prices decreased sharply following the bearish IEA report and concerns on increasing US production.
IEA’s latest report increased bearish sentiment and triggered the market to take profits from their long positions which brought prices down. IEA cut their oil demand growth forecast by 100 MBbl/d for 2017 and 2018. The group stated that warmer temperatures could reduce consumption while increasing output from some countries may cause the crude market to be oversupplied in the first half of 2018.
The downward price move following the IEA report suggests that the recent price rally fueled by the unrest in the Middle East was purely based on bullish sentiment and speculations, not on fundamentals, hence unsustainable. IEA’s bearish report and pessimistic outlook on the global supply/demand picture will be resistance to any existing or new events creating bullish bias until the OPEC meeting.
With the IEA taking a much more bearish stand along with increasing US and non-OPEC production, the market may approach the upcoming OPEC meeting a bit more cautiously. The latest IEA report and current sentiment in the market has left OPEC and the major producers in a tight spot, as they now may be forced to extend the production cuts to normalize the inventory levels in an attempt in increasing prices.
In the case of a higher price environment, the possibility of US producers increasing activity and Libya willing to increase production to 1.25 MMBbl/d remains as a threat to global supply.
The market has now held over $49.00/Bbl for over a month, establishing that as the low end of the new range. It is still critical that high compliance with production quotas and realization of the demand growth projected by IEA will need to occur in order 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 $50-$53/Bbl in the coming weeks as fundamentals start to settle back in.
Please find the updated Drillinginfo charts on the link below:
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