US crude oil stocks increased by 2.2 MMBbl last week. Gasoline inventories increased by 0.8 MMBbl, while distillate inventories posted a decline of 2.6 MMBbl. Yesterday afternoon, API reported a crude oil build of 1.1 MMBbl while reporting gasoline and distillate draws of 2.7 MMBbl and 1.9 MMBbl, respectively. Analysts, to the contrary, were expecting a crude oil draw of 2.6 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted an increase of 1.4 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 46 MBbl/d from last week, per EIA. Crude oil imports increased by 539 MBbl/d last week, to an average of 8.5 MMBbl/d. Refinery inputs averaged 16.6 MMBbl/d (328 MBbl/d less than last week), leading to a utilization rate of 90.8%. The reaction to the report has been mixed, as bearish sentiment from crude oil and total petroleum stocks build are slightly being offset by uncertainty of Trump’s stance on the Iran nuclear deal. Prompt-month WTI was trading up $0.10/Bbl at $67.80/Bbl at the time of writing.
WTI prices traded in the $67-to-$69/Bbl range last week. Both benchmarks had a strong run during the week, with WTI approaching $70/Bbl and Brent briefly topping the $75/Bbl mark — its highest point since November 2014. Prices have been on an upward trajectory, with rising geopolitical tensions and a tightening oil market due to successful OPEC cuts and declining Venezuelan production. Prices retracted some of their gains on Tuesday, as President Trump changed his tone on the Iran nuclear deal, which somewhat diminished the possibility that Iran sanctions will be reintroduced.
President Trump’s stance on the Iran nuclear deal has been one of the major catalysts supporting the bullish sentiment and recent price rally. The president changed his tone following his meeting with French President Emmanuel Macron, as he did not repeat his threats to withdraw the nuclear deal and reimpose sanctions on Iran, and signaled that the US and France are close to reaching an agreement to preserve the Iran nuclear deal. Although news from the White House somewhat eased concerns about Iranian supply should sanctions be reintroduced, sentiment in the market remains bullish, with other factors driving the price rally. One of the main catalysts is successful OPEC cuts and declining Venezuelan production. Inventory levels are on track to fall to their five-year average levels toward the end of the year if compliance continues. Rising tensions between Saudi Arabia and Iran due to attacks on Saudi Arabia by Houthi rebels in Yemen, as well as Saudi Arabia’s push for an $80/Bbl Brent mark ahead of the IPO of Saudi Aramco, will continue to support prices. Prices also got support from Reuters’ estimates on Asian oil demand hitting record levels in April, with China’s oil imports reaching record levels of 9 MMBbl/d.
Although market sentiment remains bullish on geopolitical tensions and OPEC cuts, strong production growth from the US will continue to limit any significant sustainable price rally and will work against OPEC’s efforts to reduce supply levels. The US rig count continues to climb, and production is still on track to surpass 11 MMBbl/d before the end of the year. US production 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.
President Trump needs to deliver his verdict on the Iran nuclear deal by May 12. Trade may be volatile depending on Trump’s tone and his stand on the issue between now and then. Should additional bullish news lead more length, then the market may be faced with a potential “blow-off” topping pattern at or above $70/Bbl. Although this type of speculative bubble could leave the market open for a major sell-off, the market’s continued strength of late limits the potential. While additional news regarding OPEC quotas, inventory normalization, or temporary supply disruptions due to geopolitical issues will continue to cause short-term price gains, the promise of additional growth from US producers if prices remain at these levels 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, high quota compliance must continue through 2018 concurrent with the demand growth projected by IEA. Without inventory normalization, the price recovery cannot be sustained. Drillinginfo believes that the retracements from failed tests of $70/Bbl will set up the market for a potential range between $58 and $62 for the next several months.
Please find the updated Drillinginfo charts on the link below: