US crude oil stocks decreased by 1.6 MMBbl last week. Gasoline inventories increased by 0.3 MMBbl, while distillate inventories posted a decline of 2.4 MMBbl. Yesterday afternoon, API reported a small crude oil draw of 0.9 MMBbl, while reporting a gasoline build of 1.5 MMBbl and a distillate draw of 3.6 MMBbl. Analysts were expecting a small crude oil build of 1.3 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted a decrease of 7.9 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 down 1 MBbl/d from last week, per EIA. Crude oil imports decreased by 867 MBbl/d last week to an average of 7.0 MMBbl/d. Refinery inputs averaged 15.8 MMBbl/d (329 MBbl/d fewer than last week), leading to a utilization rate of 88.1%. The report is bullish, as the crude oil withdrawal was larger than expected and total petroleum stocks posted a significant withdrawal. Prompt-month WTI was trading up $1.04/Bbl to $62.71/Bbl at the time of writing.
WTI prices traded in at the $61/Bbl-$62/Bbl range last week. Prices have pulled back from the highs of the beginning of the year, with trading in a tight range being pulled in both directions. Prices got some support from the surprise crude inventory decline reported by API on Wednesday, but the gains were offset by a stronger dollar.
IEA’s report last week had both bullish and bearish elements. A higher forecast for oil demand growth in 2018 (from 1.3 MMBbl/d to 1.4 MMBbl/d) and global inventories only being 52 MMBbl above the five-year average at end of 2017 supported the bullish sentiment. However, IEA’s warning that the early market conditions in 2018 seems to be reminiscent of the first wave of US shale growth that prompted the price crash in 2014. In addition, US production growth in 2018 can potentially meet increasing global demand, contributing to bearish sentiment and doubts on the success of OPEC supply cuts.
The decline in prices and IEA’s warning that the US production growth could potentially be offsetting OPEC’s efforts in normalizing inventory levels certainly came at a bad time for Saudi Arabia, because the country needs high and stable oil prices in 2018 to have a successful IPO of Saudi Aramco. Following the recent price decline and IEA’s remarks, Saudi Arabia’s Energy Minister Khalid al-Falih stated that the Saudis will be firmly holding in the production cuts by end of the year, and they would risk over-tightening the market and not fully achieve the goal. Al-Falih told reporters that producers should keep cutting for the whole year, even if it causes a small supply shortage. He also added, “If we have to overbalance the market a little bit, then so be it.” As always, his comments came right after prices are pressured by fundamentals in the market.
The comments by Khalid-al-Falih and the willingness of OPEC to normalize inventory levels at the risk of losing market share to the US, coupled with IEA’s increased 2018 demand growth, will keep supporting prices. While increasing US production, as it is projected to reach 11 MMBbl/d by the end of 2018, coupled with the upcoming refinery maintenance season will keep a lid on any significant price rally.
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) near term, as the consolidation of the collapse continues. 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 continues through 2018, and that the demand growth projected by the IEA occur concurrently in order for the market to have any chance of normalizing inventories back to the levels 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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