Increasing Inventory With Weaker Demand Keep Prices Lower

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US crude oil stocks increased 6.8 MMBbl last week. Gasoline inventories decreased 0.7 MMBbl, while distillate inventories increased 3.6 MMBbl. Yesterday afternoon, API reported a crude oil build of 3.66 MMBbl, alongside a distillate build of 1.94 MMBbl and gasoline draw of 1.56 MMBbl. Analysts, to the contrary, were expecting a crude oil draw of 2.50 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted a significantly large build of 17.4 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 100 MBbl/d from last week, per EIA. Crude oil imports were up 1.08 MMBbl/d last week, to an average of 9.0 MMBbl/d. Refinery inputs averaged 18.0 MMBbl/d (383 MBbl/d more than last week), leading to a utilization rate of 98.1%. The report is extremely bearish due to significantly large crude oil stocks and record-high total petroleum stocks build. The bearish report and a darkening global economic growth picture sent prices spiraling down. Prompt-month WTI was trading down $2.16/Bbl, at $64.88/Bbl at the time of writing.

Increasing Inventory With Weaker Demand Keep Prices Lower

Prices traded in a tight range of $66/Bbl to $68/Bbl last week. Prices continued their declines and saw further pressure due to worries of increasing supply and, weaker demand as well as a possible global economic crisis due to financial turmoil in Turkey.

Although Turkey is a small consumer of oil and accounts for less than 1 MMBbl/d (~ 1% of global demand), Turkey’s current financial crisis has increased concerns about a weakness in the overall global economic growth and oil demand. Turkey’s currency crashed to an all-time low against the dollar after President Donald Trump announced tariffs on Turkish steel and aluminum. Turkey’s financial crisis alone is not the main concern for the markets; the potential risk of economic and financial crisis contagion throughout emerging economies seems to be the real threat. The worries of weakening global economy and demand growth due to trade wars between the US, China and EU increased further after the crisis in Turkey, which is pressuring prices even further. Prices saw more pressure due to an abundance of unsold crude cargoes in the Atlantic Basin, where traders are struggling to place crude from these cargoes.

The pressure on prices has been immense with the escalation of trade wars and a weaker demand growth, however the expectation of Iranian crude being removed from the market is keeping the floor for prices strong. The first round of sanctions against Iran was reinstated last week; a harsher second round, which would include crude sanctions, is expected to come in November. Until the announcement is made, expectations of sanctions will keep the bullish sentiment alive. Another factor working against the bearish sentiment is the lower month-to-month production from Saudi Arabia. Saudi Arabia had pledged to boost production to offset the supply disruption in the latest OPEC meeting and has increased production since. However, the latest figures by secondary sources in OPEC showed Saudi production in July declining by ~53 MBbl/d from June levels. Saudi Arabia’s self-report shows this drop as 200 MBbl/d, which could be attributable to preventing a downward price correction amid a global demand weakness and unsold crude cargoes increasing.

For the third consecutive week, prices expanded the range downward with lower lows. Last week’s declines tested the $66/Bbl level before finding a bid. Even with the recent downward push, the market still maintains a bullish bias. However, the recent financial turmoil in Turkey and continuing trade wars may reverse the sentiment should situations worsen. Prices in WTI should continue to find support around $66/Bbl, but should declines continue, the lows from June at $63.59/Bbl could become a target. If the speculators run prices up past the high end of the recent range at $70/Bbl, the target could be as high as $75/Bbl. Eventually, after the volatility recedes and consolidation commences, the quota easement, continued US growth, and fears of a weaker demand growth lead Drillinginfo to believe that the supply and demand for crude may force a retracement of prices to settle in a zone of between $58/Bbl and $65/Bbl for an extended period of time.

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