US crude oil stocks decreased by 2.6 MMBbl last week. Gasoline and distillate inventories decreased by 1.7 MMBbl and 2.0 MMBbl, respectively. Yesterday afternoon, API reported a large crude oil build of 5.3 MMBbl while reporting gasoline and distillate draws of 5.8 MMBbl and 2.2 MMBbl, respectively. Analysts, to the contrary, were expecting a smaller crude oil build of 1.0 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted a decrease of 1.6 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 26 MBbl/d from last week, per EIA. Crude oil imports increased by 1.1 MMBbl/d last week, to an average of 8.1 MMBbl/d. Refinery inputs averaged 16.8 MMBbl/d (18 MBbl/d more than last week), leading to a utilization rate of 92.3%. The report is bearish, as crude oil inventories posted a decline while gasoline and distillate withdrawals were less than expected. Prompt-month WTI was trading down $1.47/Bbl to $63.78/Bbl at the time of writing.
WTI prices traded in the $64/Bbl-$66/Bbl range last week. Prices have been trending higher due to recent geopolitical tensions but lost some of their gains yesterday and today due to a large crude build, a stronger dollar and a profit-taking rally. News regarding Saudi Arabia and Russia possibly forming a long-term partnership to manage crude supplies supported the prices.
The tensions between Saudi Arabia and Iran over the Iran nuclear deal, which was initiated with Rex Tillerson’s departure from the White House, increased as Saudi air defenses shot down several ballistic missiles fired by Yemen’s Iran-aligned Houthi militia. Saudi Arabia stated it has the right to respond against Iran at the right time and place. Bullish sentiment increased further as Saudi Crown Prince Mohammed bin Salman stated that Riyadh and Moscow were considering extending an alliance on oil curbs that began in January 2017. Salman stated the goal of the partnership would be shifting from a year-to-year agreement to a 10-20-year agreement in order to better control crude supplies from OPEC and non-OPEC countries. The Saudi crown prince also commented on the much-anticipated IPO of Saudi Aramco, stating that the listing of 5 percent of the firm could take place at the end of 2018 or the beginning of 2019.
Although the bullish sentiment from geopolitical tensions and Saudi comments continues to create short-term price gains, continuously increasing US production and the future supply/demand imbalance potential remain intact and continue to pressure prices. US production is still projected to surpass 11 MMBbl/d in 2018, and could grow even further if speculative bullish news continues to cause short-term price gains, which will further increase US producers’ appetite for higher production.
The market internals improved last week. At last week’s end, the market was not overbought, and had markings of extending higher. Prices could be testing the highs from January at $66.66/Bbl in the near term, especially with the recent news from Saudi Arabia. While additional news regarding OPEC quotas, inventory normalization or temporary supply disruptions due to geopolitical issues could cause short-term price gains and volatility to continue, the promise of additional growth from US producers is likely to limit longer-term extensions. For the market to have any chance of normalizing inventories to levels seen prior to the price crash, it is critical that high quota compliance continues through 2018 and that the demand growth projected by IEA occurs concurrently. Without inventory normalization, the price recovery cannot be sustained. Drillinginfo believes that the market will eventually refocus on the fundamental realities and expects prices to retreat to mid-$50/Bbl levels for a period.
Please find the updated Drillinginfo charts on the link below:
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