US crude oil stocks increased 5.8 MMBbl last week. Gasoline inventories increased 1.9 MMBbl while distillate inventories declined 1.0 MMBbl. Yesterday afternoon, API reported a crude oil draw of 1.3 MMBbl while reporting a gasoline build of 0.98 MMBbl and a distillate draw of 1.3 MMBbl. Analysts were expecting a crude oil draw of 1.6 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted a large build of 6.7 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 2 MBbl/d from last week, per EIA. Crude oil imports were up 558 MBbl/d last week, to an average of 8.2 MMBbl/d. Refinery inputs averaged 16.6 MMBbl/d (7 MBbl/d less than last week), leading to a utilization rate of 91.8%. The report is bearish due to sizable and larger than expected crude oil and total petroleum stock build. Rumors surrounding the possibility of OPEC increasing output in June to offset Venezuelan and possible Iranian declines also put further pressure on prices. Prompt-month WTI was trading down $0.35/Bbl at $71.85/Bbl at the time of writing.
Prices traded in the $71-$73/Bbl range last week. Both Brent and WTI rose to their highest levels in 3½ years, as Brent exceeded $80/Bbl and WTI $72/Bbl levels. Prices have been trending higher as the market focus remains on renewed Iranian sanctions, declining Venezuelan production, and geopolitical unrest in the Middle East.
Bullish sentiment from President Trump’s decision to reintroduce Iranian sanctions increased on Monday following US Secretary of State Mike Pompeo’s remarks. Pompeo vowed to tighten sanctions on Iran, with a long list of demands that Iran must meet before the US will enter a new nuclear pact with the country. The election results from Venezuela added more strength to prices. Nicolas Madura secured another six-year term as the president, which could mean the US possibly imposing additional sanctions on Venezuela, mainly targeting its oil industry. Venezuela’s production has been on a downward spiral, which helped OPEC achieve higher compliance rates as well as supporting prices. Further sanctions on Venezuela’s oil industry coupled with the reimposition of Iranian sanctions could intensify worries of a drop in global supply levels, which will continue to support prices.
As bullish sentiment and prices continue to rise based on the possibility of sanctions and geopolitical risks, the US will continue to grow its production, which will work against the production drops. There still remains the risk that Iranian sanctions will not have a strong impact if other US allies continue waiving sanctions on Iran. There also is the possibility that Saudi Arabia and OPEC will increase production to offset the declines from Venezuela and Iran — most likely occuring after the IPO of Saudi Aramco — as Saudi Arabia wants this IPO to occur in a high price environment. Another catalyst that may put a ceiling on prices moving forward could be weakening demand, as higher prices could limit the economic growth and the demand for petroleum products. The IEA recently revised its demand growth forecast to 1.4 MMBbl/d, down from 1.5MMBbl/d.
Prices may continue to increase as the market focuses on further declines from Venezuela and sanctions on Iran, thereby accelerating the normalization of global inventories. However, the possibility of weakening demand and US operators taking advantage of high prices may limit the price increase. There are still many long positions in the market, and the prices have remained extended for six consecutive weeks. In other such occurrences since last summer, the gains have been met with a significant decline or a decline to set up a consolidation of trade. This could mean that the market is approaching an overbought level, and a large profit taking could take place, sending prices lower. The record levels of total open interest and active position management by the market’s sector suggest significant volatility in weeks to come. When volatility subsides, the market will inevitably settle on a longer-term equilibrium for WTI prices. Drillinginfo believes that equilibrium will center around $65/Bbl. This reflects the fundamentals of the market, taking into consideration growing US production, the strain on demand (due to higher prices), the impact of Iranian sanctions, continued Venezuelan declines, and the possible abandonment of OPEC quotas.
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