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Large Crude Inventory Build Halts the Price Rally


US crude oil stocks posted a large increase of 7.2 MMBbl from last week. Gasoline and distillate inventories decreased 1.8 MMBbl and 2.0 MMBbl, respectively. Yesterday afternoon, API reported a crude oil build of 3.0 MMBbl alongside gasoline and distillate draws of 2.6 MMBbl and 1.0 MMBbl, respectively. To the contrary, analysts were expecting a crude oil draw of 0.4 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted a large increase of 7.2 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 0.22 MMBbl/d last week, to an average of 6.8 MMBbl/d. Refinery inputs averaged 15.8 MMBbl/d (18 MBbl/d more than last week), leading to a utilization rate of 86.4%. The price rally lost its pace and stalled due to the large crude oil inventory and total petroleum stocks builds. However tightening supply levels and a more positive outlook in demand will continue to support prices, while increasing US production and the uncertainty around US-China trade disputes will pressure prices. Prompt-month WTI was trading down $0.12/Bbl, at $62.46/Bbl, at the time of writing.

Prices traded in the $60/Bbl to $63/Bbl range last week as they sharply rose at the beginning of the week, nearing five-month highs edging closer to the $63/Bbl level. WTI rose nearly 32% during the first quarter of 2019, logging the strongest quarterly rally since the second quarter of 2009. Continuing OPEC+ production cuts and further declines from Venezuela continued to support prices. The sharp increase at the beginning of the week came as long bullish bets on prices increased significantly due to news about tightening supply levels, and the easing of global economic growth fears.

Prices ended the week strong as Saudi Arabia seemed stern about bringing the Brent price at least to $70/Bbl and ignoring US President Donald Trump’s tweet about increasing the flow of oil to reduce prices. Money managers increased their bullish positions at the beginning of the week after a Reuter’s report showed OPEC production in March falling to its lowest levels in four years, with Saudi Arabia bringing its production below its committed quota, as well as Chinese factory activity posting the sharpest rise in the last eight months and easing the fears about a global economic slowdown.

The sentiment in the market shifted to bullish and will remain strong as Saudi Arabia is signaling and acting on its promise to do whatever it takes to bring balance to the market. Continuously declining Venezuelan production, a more positive outlook in global economic growth, and EIA signaling a possible slow down in US production will continue to support prices. The US sanctions on Iranian crude and the US government’s decision about the waivers granted to certain countries will also support prices in the near term as the market expects the sanctions to continue, possibly without the waivers in place.

Although prices increased significantly with rising long positions due to tightening supply levels and some bullish headlines around demand, the increasing US production and uncertainty about the US-China trade disputes will keep the pressure on prices. It is also important to note that significantly increasing long bets always poses a larger risk to prices if sentiment shifts quickly due to fundamentals or any bearish headlines.

Last week’s trade closed over the $60.00/Bbl milestone and was the highest weekly close since early November 2018. Prices increased further, with long positions rising significantly. The trade may extend the gains and break through the $63/Bbl range but will need more bullish headlines to support this level before it finds some selling. The market will closely watch any other news surrounding demand, and global economic health and will trade on the demand side as the long position rally was largely due to the supply side. Any slight shift in sentiment due to fundamentals or bearish news could cause a consolidation phase with a potential retracement back to the $60/Bbl range. In the long term, the OPEC+ decision on supply cuts for the second half of the year will be the key driver for prices as Brent currently is near the levels Saudi Arabia wanted to reach.

Petroleum Stocks Chart

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