Enverus Blog

Insights across the energy value chain

US crude oil stocks posted an increase of 6.8 MMBbl from last week. Gasoline and distillate inventories increased 3.2 MMBbl and 4.6 MMBbl respectively. Yesterday afternoon, API reported a crude oil build of 3.6 MMBbl, alongside gasoline and distillate builds of 2.7 MMBbl and 6.3 MMBbl, respectively. Analysts, to the contrary were expecting a crude oil draw of 0.2 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted an increase of 22.4 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.

US crude oil production increased 100 MBbl/d last week, per the EIA. Crude oil imports were up 1.07 MMBbl/d last week to an average of 7.3 MMBbl/d. Refinery inputs averaged 16.9 MMBbl/d (171 MBbl/d more than last week’s average), leading to a utilization rate of 91.8%. Report is bearish due to huge crude and total stocks builds and pressuring prices. Prompt-month WTI was trading down $2.13/Bbl, at $51.35/Bbl, at the time of writing.

Prices had a tough week, tumbling to their three-month lows on Friday and ending the month of May with the largest monthly drop since November of 2018, as trade tensions and fears of a slowdown in global economic and demand growth reached new heights.

The trade tensions between the US and China already had increased to new heights after China signaled the restriction of rare earth mineral exports to the US, which increased concerns about the global economy. The gloomy situation got even worse on Friday as the market reacted to President Donald Trump’s comments on Twitter, where he announced imposing 5% tariff on all goods imported from Mexico starting June 10. The tariff would gradually rise to 25% until Mexico resolves the illegal immigration issue. The comments by the president added more fuel to the already burning fire regarding global economic and demand growth, as the US and Mexican economies are very much tied, and the tariffs would be felt by American consumers. Also pressuring prices was disappointing manufacturing activity from China, as it shrank more than expected. The news from China increased the bearish sentiment, as the market starts to wonder how much more impact the continuing US–China trade war will have on economic growth in China and in other economies across the world.

Though increasing worries on global economic health have increased the bearish sentiment, the possibility of OPEC extending the supply cuts to the second half of the year and tensions in the Middle East are supporting prices. Tuesday brought some support to prices as Saudi Energy Minister Khalid al-Falih stated that a consensus was emerging among producers to continue working “to sustain market stability” in the second half of the year. The final decision will be made during OPEC’s next meeting which will be at the end of June or beginning of July. The main risk to the supply-cut extension is Russia’s interest in participation, which at this point seems unlikely. US Federal Reserve Chairman Jerome Powell’s comments on a possible cut in interest rates also gave some support to prices.

Prices have now established a distinctly bearish bias. The next area for the declines to test is the lows from February, at $51.23/Bbl. After closing last week just off the lows of the week, prices are poised to extend the declines early this week. The market is entering a very volatile period, as the geopolitical unrest in Middle East may cause violent snapbacks in prices. Currently, the global economic growth issue is well defined by the market, driving prices downward. The unknown in the WTI market is the unrest in the Middle East and what the OPEC meeting later in June or at the beginning of July will provide. Markets tend to overshoot directionally, and with WTI starting to approach extremely oversold levels, a bounce back should be expected over time. Perhaps traders will continue to liquidate length and force prices down to the February. The alternative, which may happen after early weakness, would have prices finding a bid and testing the range between $56/Bbl and $57.33/Bbl. An extension of a rally beyond that range, up to $63.81/Bbl, will require substantive news to offset global economic concerns.

Petroleum Stocks Chart

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