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Fundamentally Flawed


US crude oil stocks showed no change from last week. Gasoline inventories increased 3.0 MMBbl and distillate inventories remained the same. Yesterday afternoon, API reported a crude oil build of 6.9 MMBbl alongside a gasoline build of 3.7 MMBbl and a distillate draw of 0.6 MMBbl. Analysts, to the contrary, were expecting a crude oil draw of 2.9 MMBbl. The most important number to keep an eye on, total petroleum inventory level, posted a decrease of 2.0 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 233 MBbl/d last week, to an average of 7.7 MMBbl/d. Refinery inputs averaged 17.3 MMBbl/d (58 MBbl/d less than last week), leading to a utilization rate of 95.1%. Prices are getting support from the total inventory withdrawal but remain generally pressured by the supply overhang. Prompt-month WTI was trading up $0.84/Bbl, at $45.45/Bbl at the time of writing.

Prices have been declining since the managed money long positions started liquidating after growing tired of waiting for oil prices to climb up higher given Venezuelan production declines, Iranian sanctions, and the impending OPEC cuts. However, the waivers on Iranian exports granted to the biggest importing countries took the attention away from the Iranian declines. Additionally, the Chinese market started consuming more discounted Iranian barrels, while pushing out US exports heading for the country amidst the trade wars. OPEC and other quota carrying countries are set to cut production to compliance levels in January. However, the first quarter is the lowest demand season of the year, so the impact of the cuts will not reflect in the fundamentals until the second quarter.

Compliance by Russia also remains a question mark, as they have stated that they intend to reach compliance steadily by the end of the period rather than the beginning of the year. Meanwhile, US production continues to grow given the high rig count. Although infrastructure constraints are concerning, they have been successfully addressed to date, allowing for production to grow ~1.3 MMBbl/d exit-to-exit this year. The growing worries around a global economic slowdown do not support a high demand growth scenario next year, further damaging the prospects of a brighter supply and demand picture in the coming year.

Although the OPEC and other quota-carrying countries’ cuts will take nearly 1.2 MMBbl/d off the market and Alberta has imposed an 8.7% reduction (ramping back up over the course of the year) of Canadian production to deal with transportation bottlenecks, the fundamentals remain bleak. Drillinginfo expects prices to remain volatile within a $40-$50/Bbl window over the next month as the market tries to make sense of the fundamentals. The impacts of the production cuts and the changing demand dynamics (both seasonally and geopolitically) will dictate the direction of prices out of the range. Extensions downward could be driven by stock builds despite the production cuts. Extensions upwards would require a surprise reversal of the overhang in the first several months of data releases for stocks and by global overwatch agencies like the IEA.

Petroleum Stocks Chart

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