US crude oil stocks decreased by 5.7 MMBbl last week. Gasoline and distillate stocks posted an increase of 0.9 MMBbl and 0.5 MMBbl respectively. Yesterday afternoon, API had reported a crude oil withdrawal of 7.1 MMBbl, while reporting gasoline and distillate builds of 1.9 MMBbl and 1.6 MMBbl respectively. Analysts on the contrary, were expecting a more modest withdrawal of 4.0 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted a sizable withdrawal of 8.7 MMBbl. For a summary of the crude oil and petroleum product stock movements, see table below.
US production was estimated to be down 1,074 MBbl/d from last week per EIA’s estimate. Lower 48 production decreased 1,083 MBbl/d (due to Hurricane Nate’s effect in the Gulf of Mexico). Alaska production increased 9 MBbl/d. Imports were down by 134 MBbl/d last week to an average of 7.5 MMBbl/d. Refinery inputs averaged 15.4 MMBbl/d (819 MBbl/d less than last week), leading to a utilization rate of 84.5%. The report is bullish due to large crude oil and total petroleum stocks withdrawal. Prices are up, with prompt month WTI trading up $0.11/Bbl at $51.99/Bbl.
Prices traded in the $51-$52/Bbl range last week. They were supported by OPEC’s higher demand expectations and the Secretary General stating that the group may need to take extraordinary measures to balance the market next year. Prices got more support on Monday with geopolitical tensions and uncertainty from Iran (nuclear agreement under review) and Iraq (tensions between central government & Kurdish region).
Iraqi forces took control over the oil fields as well as a military base and an airport in the Northern Iraqi region, around the city of Kirkuk following the Kurdish independence referendum last month. The region produces and exports nearly 600 MBbl/d via a pipeline that flows through the Turkish port of Ceyhan. The Turkish President, Recep Tayyip Erdogan, had already threatened to shut down this pipeline if the referendum was successful but has since rescinded his decision. Early reports signal that nearly 350 MBbl/d of production was temporarily shut off due to unrest and fighting in the region. Bullish sentiment has increased on the crude outages in the region as well as anticipation of the situation getting worse leading to further supply disruptions.
General sentiment in the market is bullish with geopolitical tensions rising and OPEC allegedly leaning towards extending the supply cuts. However, the recent price rally also brings some bearish sentiment along with it since it benefits US producers. US producers may take advantage of the higher price environment and increase their activity which will result in higher production.
The next OPEC meeting is scheduled for November 30th in Vienna. It is expected that OPEC will make an announcement or shed some light on the possibly of extending the quotas. In the meantime, the possibility of US producers increasing activity, as well as the potential for Libya and Nigeria to add more production to the market will keep a lid on prices.
As previously stated here, continued high compliance with production quotas and realization of the demand growth projected by IEA will need to occur simultaneously for any chance of near-term inventory normalization. Without inventory normalization, there can be no sustained price recovery. Drillinginfo expects the potential trade to stay between $50-$52/Bbl in the near term until the geopolitical tensions in the Middle East are resolved and the market once again looks for long-term signs of inventory normalization.
Please find the updated Drillinginfo charts on the link below: