US crude oil stocks increased by 6.2 MMBbl last week. Gasoline inventories increased by 1.2 MMBbl, while distillate inventories posted a decline of 3.9 MMBbl. Yesterday afternoon, API reported a crude oil build of 3.4 MMBbl, alongside a gasoline build of 1.6 MMBbl and distillate draw of 4.1 MMBbl. Analysts were expecting a smaller crude oil build of 0.7 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted a notable increase of 5.4 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 33 MBbl/d from last week, per EIA. Crude oil imports increased by 80 MBbl/d last week, to an average of 8.5 MMBbl/d. Refinery inputs averaged 16.6 MMBbl/d (60 MBbl/d less than last week), leading to a utilization rate of 91.1%. The report is bearish due to sizable crude oil and total petroleum stocks build. Although prices are getting support from possible withdrawal from the Iran nuclear agreement, a bearish EIA report and strong US production will pressure prices. Prompt-month WTI was trading up $0.13/Bbl at $67.38/Bbl at the time of writing.
WTI prices traded in the $67-$69/Bbl range last week. Surging production levels in the US and a stronger dollar on expectations of an interest rate hike caused WTI prices to decline on Tuesday, despite the uncertainty around the Iran nuclear deal. Although prices saw a notable dip, they are still within $1 of their three-year highs.
Bullish sentiment from President Trump reintroducing Iranian sanctions increased after Israeli Prime Minister Benjamin Netanyahu’s comments on Monday. Netanyahu accused Tehran of secretly building nuclear weapons, to which Trump quickly responded by stating Netanyahu was 100% right. President Trump has until May 12 to decide whether to extend sanction waivers on Iran or pull out of the deal. As things stand, the consensus is that Trump will reimpose sanctions unless Britain, France, and Germany can come up with a plan to fix what he views as the flaws of the deal. Even though reimposing sanctions on Iran would significantly disrupt OPEC’s third-largest producer’s crude supplies, the price action may not be as dramatic, as prices have already risen significantly on the expectations of Trump scrapping the deal. Bullish sentiment from the Iran nuclear deal being already baked into prices could cause a sharp drop and correction if Trump decides to keep the Iranian deal intact.
Although Netanyahu’s and Trump’s comments increased bullish sentiment, EIA’s latest report showing US production surging in February coupled with a stronger dollar was enough to offset the bullish sentiment and drove prices lower. As previously stated, prices have been gaining strength on geopolitical tensions as well as the Iran nuclear deal, and downward price corrections could be expected as the market pays more attention to fundamentals. Prices will be further pressured by continuously increasing the US rig count and rapidly increasing production, which is still on track to surpass 11 MMBbl/d before the end of the year. Some producers have already increased their production guidance due to higher prices and efficiency gains, and this trend will continue if prices remain at current levels or increase further.
As the market awaits President Trump’s decision on the Iranian nuclear deal, prices will be tugged in both ways by the possibility of additional bullish news and increasing US production. Should additional bullish news lead to more length, then the market may be faced with a potential “blow-off” topping pattern at or above $70/Bbl, which will increase the risk for a potential major sell-off, especially if Trump decides to extend the Iran nuclear deal. Should selling occur, however, don’t expect prices to collapse down to $60/Bbl immediately. While additional news regarding OPEC quotas, inventory normalization, or temporary supply disruptions due to geopolitical issues will continue to cause short-term price gains, the promise of additional growth from US producers if prices remain at these levels is likely to limit longer-term extensions. For the market to have any chance of normalizing inventories to levels seen prior to the price crash, high quota compliance must continue through 2018 concurrent with the demand growth projected by the IEA. Without inventory normalization, the price recovery cannot be sustained. Drillinginfo believes that the speculative long sector’s sell-off will likely set up the market for a potential range of $58-$62/Bbl in the next several months.
Please find the updated Drillinginfo charts on the link below: