US crude oil stocks increased by 4.6 MMBbl last week. Gasoline and distillate stocks decreased by 2.1 MMBbl and 5.7 MMBbl respectively. Yesterday afternoon, API had reported a crude oil build of 1.4 MMBbl, alongside gasoline and distillate withdrawals of 5.1 MMBbl and 6.1 MMBbl respectively. Analysts were expecting a larger crude build of 2.4 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted a sizeable withdrawal of 6.6 MMBbl. For a summary of the crude oil and petroleum product stock movements, see table below.
US production was estimated to be up 157 MBbl/d from last week per EIA’s estimate. Lower 48 production was reported to be up 179 MBbl/d (still recovering the impact of Hurricane Harvey), while Alaska production decreased 22 MBbl/d. Imports were up by 888 MBbl/d last week to an average of 7.4 MMBbl/d. Refinery inputs averaged 15.2 MMBbl/d (1.1 MMBbl/d more than last week), leading to a utilization rate of 83.2%. The report was bullish given that the higher than expected build in crude oil stocks was more than offset by the decline in refined products, which led to a sizeable decline in total petroleum inventories. Additionally, the report showed that refining capacity utilization was picking up following the outages associated with Hurricane Harvey. Prices are up on the bullish release, with prompt month WTI trading up $0.87/Bbl at $50.77/Bbl.
Prices have been trading in the $49-$50/Bbl range, finding trouble breaking the $50/Bbl resistance level. Prices edged lower Tuesday, retreating from their five month highs on the expectations for a build in crude oil inventories given recovering imports. The bullish report Wednesday has so far reversed that trend. The market has been bullish for the last week following the IEA monthly report. The report showed OPEC supply declined 210 MBbl/d in August alongside an upward revised growth in demand of 1.6 MMBbl/d (from 1.5 MMBbl/d the prior month). Bullish sentiment is getting further support ahead of the September 22nd OPEC committee meeting in Vienna. The market is closely following news that suggest OPEC may look to extend cuts beyond the current March 2018 expiration of quotas. The news suggests that Saudi Arabia has spearheaded the conversation so far, but Venezuela & Iraq have also remained open to the extension.
The committee has also expressed their intention to reassess Nigeria and Libya’s (two countries exempt from cuts) production plans, as both countries have been increasing their output. These two countries have contributed an additional 605 MBbl/d of production growth since the 2017 low for OPEC production, posted in March. The growth from these countries has greatly undermined the efforts on OPEC’s part to keep output lower to normalize inventories, cutting into more than half of the 11 quota carrying members’ pledged cuts of 1.2 MMBbl/d. Ahead of the meeting, Nigeria announced force majeure on one of the country’s major crude grades. Although this could have a near term bullish effect on prices, it could also hurt the prospects of Nigeria agreeing to a quota. It is highly unlikely that Nigeria or Libya would be interested in capping supply at recent levels if they are below levels that are acceptable to them.
The economics of US production promise higher supply, even in a slightly higher price environment ($5-$10/Bbl). Even if the OPEC quotas are extended, US production potential will serve as a cap on how high prices can go. As previously stated here, continued high compliance with production quotas and realization of the demand growth projected by IEA will need to occur simultaneously for any chance at near-term inventory normalization. Without inventory normalization, there can be no sustained price recovery. The May and April highs ($52/Bbl & $53.76/Bbl respectively) set the high end of the current price range. Given the bullish news in the market and the nature of the inventory release, prices may test these highs. However, US production potential will keep prices from further gains prior to fundamental data showing a clear path to inventory normalization.
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