US crude oil stocks decreased by 5.4 MMBbl last week. Gasoline stocks remained unchanged while distillate inventories increased by 0.7 MMBbl. Yesterday afternoon, API had reported a crude oil and distillate draw of 5.8 MMBbl and 0.49 MMBbl respectively while reporting a gasoline build of 0.48 MMBbl. Analysts were expecting a smaller crude withdrawal of 1.75 MMBbl. The most important number to keep an eye on, total petroleum inventories decreased by 1.1 MMBbl. For a summary of the crude oil and petroleum product stock movements, see table below.
US production was estimated to be up 2 MBbl/d from last week per EIA’s estimate. Lower 48 production was reported to be down 12 MBbl/d, while Alaska production increased by 14 MBbl/d. Imports were down by 885 MBbl/d last week to an average of 7.9 MMBbl/d. Refinery inputs averaged 17.7 MMBbl/d (264 MBbl/d more than last week), leading to a utilization rate of 96.6%. Despite withdrawals in crude and total stocks, prices are down due to refinery closures and demand offsetting the supply outage caused by Harvey. WTI prices are down $0.34/Bbl to $46.10/Bbl at the time of writing.
Prices have been on a downward spiral, and recently trading in the $46-47/Bbl range. Pressure on prices was triggered by news on OPEC compliance levels falling in July. Crude drawdown and supply outages from Libya could not halt crude’s downward spiral as Tropical Storm Harvey has taken control over the energy markets in US.
Libya crude production has fallen by 360 MBbl/d (Reuters) due to three Libyan oilfields (Sharara, Hamada-Zawiya, and El Feel) stopping production caused by militant pipeline blockades. Given OPEC’s compliance and global supply/demand levels, Libya losing 360 MBbl/d would have triggered prices to increase and give some bullish sentiment to market.
However, Tropical Storm Harvey hit Texas Gulf Coast late Friday and has caused detrimental effects not only people’s lives but also on the energy sector. Harvey caused at least 12 refineries to shut down in Houston and Corpus Christi areas (including Motiva’s Port Arthur refinery, the largest in the nation and Exxon’s Baytown refinery, 2nd largest in the nation) reducing US refining capacity by at least 2.2 MMBbl/d. There could be additional refinery closures as Harvey makes its way to Eastern Texas and Louisiana reducing the refining capacity more. Refinery shut downs caused gasoline futures to spike to highest levels seen since 2015 on Monday.
Harvey has also had a significant impact on crude supply with current Gulf of Mexico output down nearly 379 MBbl/d (21.6% of current output) and onshore production down approximately 300 MBbl/d, as estimated by the Interior Department’s Bureau of Safety and Environmental Enforcement. This number will likely increase as producers assess the impact of the storm and full reports come in, particularly in the Eagle Ford area where many producers had already started idling production. Although crude production is down significantly, Harvey has hit demand harder putting the market in a long position. Although the effects of tropical storms are usually short-lived, it is currently unclear how soon the refineries and production can come back online. The market is anticipating any news of long-term damage to refining or production infrastructure.
Harvey has changed the dynamics of energy markets in the short term, however when refineries are fully operational and production from US and Libya recovers back to normal levels, continued high compliance with production quotas and concurrent realization of the demand growth projected by IEA, will still need to occur for the inventory normalization this year. Without inventory normalization, there can be no sustained price recovery. DrillingInfo expects prices to trade near the $45 range in the near-term due to Harvey’s effect on energy sector as well as continued lack of data regarding the pace and trajectory of inventory normalization.
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