US crude oil stocks increased by 6.8 MMBbl last week. Gasoline and distillate inventories decreased by 2.0 MMBbl and 1.9 MMBbl, respectively. Yesterday afternoon, API reported a crude oil build of 3.2 MMBbl, a gasoline build of 2.7 MMBbl and a distillate draw of 4.1 MMBbl. Analysts were expecting a smaller crude oil build of 0.1 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted an increase of 2.1 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 41 MBbl/d from last week, per EIA. Crude oil imports decreased by 380 MBbl/d last week to an average of 8.4 MMBbl/d. Refinery inputs averaged 16 MMBbl/d (470 MBbl/d less than last week), leading to a utilization rate of 88.1%. The report is bearish, as EIA reported an increase in crude oil inventories for the first time in 11 weeks; the build was also higher than API expected. Prompt-month WTI was trading down $0.34/Bbl at $64.16/Bbl at the time of writing.
WTI prices traded in the $63-$65/Bbl range last week. Prices retreated from their more-than-three-year highs on concerns over rapidly increasing US crude oil production. The recent price rally and the strong start to the year were largely due to extensions of the OPEC supply cuts, geopolitical unrest in the Middle East, temporary supply disruptions, and weakening strength of the dollar.
Prices had one of the strongest starts to a calendar year in five years due to bullish events, thus increasing speculative long bets. OPEC’s supply-cut compliance has been stronger than expected, and extension of the supply cuts will certainly help reduce the inventory levels to the desired five-year average. However, the price increase triggered by OPEC’s supply-cut efforts have incentivized US producers to increase activity and production.
The market has been bullish for some time, and there are still some factors that keep the bullish sentiment alive. OPEC’s extension of supply cuts, their pledge to not exit from the supply cuts even in the high-price environment, and declining Venezuelan production are some of these bullish factors. However, US crude oil production edging closer to the 10 MMBbl/d level is starting to put some fear in the market. If US production continues its growth at this rate, it will surpass Saudi Arabia’s and get closer to Russia’s production levels, which would result in the US challenging these two countries for the largest crude oil market share. This could cause Saudi Arabia and Russia to revise their supply-cut plans, or it could even motivate them to start putting more crude in the market to avoid losing their market share.
The market has now held at over $60/Bbl for almost a month, establishing $60/Bbl as a resistance level. Drillinginfo expects a more consolidative trading pattern in the coming weeks as speculative traders start to re-evaluate the fundamental supply-and-demand balance. While additional news regarding OPEC quotas, inventory normalization, or temporary supply disruptions due to geopolitical issues may create short-term price gains and volatility, the promise of additional growth from US producers is likely to limit longer-term extensions. It is critical that high quota compliance continues through 2018 and that the demand growth projected by the IEA occurs concurrently in order for the market to have any chance of normalizing inventories back to what levels were prior to the price crash. Without inventory normalization, the price recovery cannot be sustained. Drillinginfo expects a significant correction of the price rally and trade to settle in a range around $55/Bbl for an extended period.
Please find the updated Drillinginfo charts on the link below: