US crude oil stocks posted a large increase of 8.0 MMBbl from last week. Gasoline inventories increased 4.1 MMBbl, while distillate inventories posted a decline of 0.6 MMBbl. Yesterday afternoon, API reported a crude oil build of 6.55 MMBbl alongside gasoline and distillate builds of 3.64 MMBbl and 2.57 MMBbl, respectively. Analysts were expecting a crude oil withdrawal of 42 MBbl. The most important number to keep an eye on, total petroleum inventories, posted an increase of 6.7 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.
US crude oil production remained unchanged last week, per the EIA. Crude oil imports were up 664 MBbl/d last week, to an average of 8.2 MMBbl/d. Refinery inputs averaged 17.0 MMBbl/d (174 MBbl/d less than last week), leading to a utilization rate of 92.9%. Although the report is bearish due to crude oil and total petroleum stocks build, prices are being supported by the turmoil in Venezuela and the possibility of US sanctions on Venezuelan crude exports. Prompt-month WTI was trading up $0.36/Bbl, at $52.98/Bbl at the time of writing.
Prices traded in the $52/Bbl to $54/Bbl range last week. It has been a busy week for prices as the market is being flooded with news about global economic growth, demand projections, OPEC supply cuts, possible fiscal stimulus plans from major economies, and the political turmoil in Venezuela.
Prices got some support and finished the week at their highest level since early December, as news surfaced of a Chinese proposal to reduce the trade imbalance between China and the US over the next six years. However, the bullish sentiment from the possible trade proposal was short-lived, with gloomy economic news hitting the market at the beginning of the week. Crude futures dropped nearly 3 percent on Tuesday due to China reporting its weakest economic growth since 1990, South-Korea reporting a six-year-low growth rate, and the International Monetary Fund (IMF) lowering its forecast for global economic growth to 3.5 percent in 2019 and 3.6 percent in 2020. All these factors increased the concerns of a slowdown in global economic growth and demand for oil-related products, which negatively weighed on prices.
On the bullish side, prices got some support from hopes that major Asian economies (Japan and China) will be introducing fiscal stimulus measures to increase growth. Other bullish catalysts supporting prices are the ongoing OPEC-led supply cuts and, lower US production growth projection by EIA, as well as the political turmoil in Venezuela and its possible impact on crude production. Following the turmoil in Venezuela, the Trump administration told US energy companies that Venezuelan oil sanctions could be put in place if the situation in the country worsens. The possibility of sanctions on Venezuelan crude alongside OPEC-led supply cuts certainly have increased the bullish sentiment and will support prices.
Although fundamentals still point to a supply overhang, the recent OPEC production numbers and the group’s willingness to lower supply levels will help sustain a strong floor for prices, while the concerns over slowing global economic growth and demand projections will be capping any significant price gains. OPEC production fell nearly 0.6 MMBbl/d in December, ahead of the official start date of supply cuts, which was January 2019. OPEC, with the aid of non-OPEC countries, led by Russia, is fully committed to cutting output by 1.2 MMBbl/d to prevent the supply glut from continuing and to bring balance to the market.
Prices in the near term will be volatile as the market assesses the OPEC supply cuts and waits for a resolution of the trade disputes between the US and China. If a deal can be reached between the countries to eliminate the currently proposed tariffs on Chinese goods or to prevent any additional tariffs, global economic and demand growth could tick upward, which could support higher prices. However, if a deal cannot be reached and the Chinese economy continues to suffer, along with other emerging economies, sentiment could shift to bearish again regardless of the OPEC and non-OPEC supply cuts pressuring prices further.
Prices in WTI settled the week up $2.21/Bbl, but the market internals were not as supportive to additional gains. WTI had a decrease in volume and continued declines in open interest as prices increased, testing resistance. A long-term bullish market needs to keep feeding the rallies with additional volume and open interest gains if the price run is to maintain its structural bias. The CFTC report is still not available due to the government shutdown, so the market is blind to position structure among the sectors. WTI prices are now challenging the high end of the range and an area of consolidation from last November and December between $49.00/Bbl and $54.55/Bbl. As the market digests production cuts, sanctions, and tariffs, the price range will be between $42/Bbl and $55/Bbl near term. Once the market has a full understanding of these elements, the price will likely stabilize around $55/Bbl.