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Large Crude Withdrawal Not Enough to Offset US-China Trade War Fears

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US crude oil stocks decreased by 4.6 MMBbl last week. Gasoline inventories decreased by 1.1 MMBbl, while distillate inventories posted an increase of 0.5 MMBbl. Yesterday afternoon, API reported a crude oil draw of 3.3 MMBbl while reporting gasoline and distillate builds of 1.1 MMBbl and 2.2 MMBbl, respectively. Analysts, to the contrary, were expecting a modest crude oil build of 0.25 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted a decrease of 3.9 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 27 MBbl/d from last week, per EIA. Crude oil imports decreased by 250 MBbl/d last week, to an average of 7.9 MMBbl/d. Refinery inputs averaged 16.9 MMBbl/d (141 MBbl/d more than last week), leading to a utilization rate of 93.0%. The report is bullish, due to larger than expected crude oil draw and total petroleum stocks withdrawal. However, prices are down as trade war between US and China escalates further. Prompt-month WTI was trading down $0.42/Bbl to $63.09/Bbl at the time of writing.

WTI prices traded in the $63/Bbl to $64/Bbl range last week. Prices marked their sharpest single-day drop early this week, due to rising Russian production and intensified fears of a trade war with China’s tariff announcement on US goods. The possibility of the US reintroducing Iranian sanctions, a decline in rig count, and falling inventory levels along with Venezuelan production supported prices.

China’s announcement it is imposing $3 billion worth of tariffs on US goods in retaliation for President Trump’s steel and aluminum tariffs dragged down prices along with rest of the market. China’s tariff plan increased the bearish sentiment, as it could weigh on economic growth and dampen petroleum product demand. Demand growth is crucial for inventory normalization and prices to be sustainable at higher levels. A global trade war could weaken the demand forecast, hence putting drastic pressure on prices. Increasing production from the US, as it is projected to surpass 11 MMBbl/d by the end of the year, will continue to support bearish sentiment. In addition to China’s tariff announcement and strong US production, the market once again is establishing a large bullish position on oil futures and also is pressuring prices. Large bullish bets on futures leave prices vulnerable to a correction if bearish sentiment increases further and causes a large sell-off.

Tensions between Saudi Arabia and Iran are still supporting the bullish sentiment, as a Saudi oil tanker was targeted by the Iran-aligned Houthi movement on Tuesday. In addition to tensions in the Middle East, the US’ pulling out of the nuclear deal and reintroducing sanctions on Iran are catalysts for bullish sentiment, as Iranian crude exports may significantly be impacted. Although speculative, Saudi Arabia and Russia showing signs of extending supply cuts by forming an alliance will keep supporting prices.

Although the bullish sentiment from geopolitical tensions, OPEC supply cuts, and declining Venezuelan production continues to create short-term price gains, continuously increasing US production, along with a global trade war spurred by the US and China, will continue to pressure prices. US production is still projected to surpass 11 MMBbl/d in 2018, and it could grow even further if speculative bullish news continues to cause short-term price gains, which will further increase US producers’ appetite for higher production.

The market is once again open for a major sell-off if sentiment shifts to being more bearish, and eventually the speculatively induced trade may leave its place to fundamentals and cause a correction. While additional news regarding OPEC quotas, inventory normalization, or temporary supply disruptions due to geopolitical issues could cause short-term price gains and volatility to continue, the promise of additional growth from US producers 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, it is critical that high quota compliance continues through 2018 and that the demand growth projected by IEA occurs concurrently. Without inventory normalization, the price recovery cannot be sustained. Drillinginfo believes that the market will eventually refocus on the fundamental realities and expects prices to retreat to a range around $55/Bbl.

Please find the updated Drillinginfo charts on the link below:

Weekly Petroleum Stocks Reports

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