US crude oil stocks decreased by 6.5 MMBbl last week. Gasoline and distillate stocks posted an increase of 1.2 MMBbl and 0.8 MMBbl respectively. Yesterday afternoon, API had reported a crude oil draw of 5.2 MMBbl, while reporting a gasoline build of 2.0 MMBbl and distillate draw of 2.9 MMBbl and 1.6 MMBbl respectively. Analysts, were expecting a more modest crude withdrawal of 3.5 MMBbl. The most important number to keep an eye on, total petroleum inventories posted a large withdrawal of 14.2 MMBbl. For a summary of the crude oil and petroleum product stock movements, see table below.
US production was estimated to be up 9 MBbl/d from last week per EIA’s estimate. Lower 48 production increased by 15 MBbl/d while Alaska production declined by 6 MBbl/d respectively. Imports increased by 471 MBbl/d last week to an average of 7.8 MMBbl/d. Refinery inputs averaged 17.1 MMBbl/d (111 MBbl/d more than last week), leading to a utilization rate of 94.1%. The report was bullish given the higher than expected withdrawal in crude oil stocks along with the sizeable decline in total petroleum inventories. Prompt month WTI was trading up $0.05/Bbl at $57.61/Bbl at the time of writing.
WTI prices traded in the $56-$58/Bbl range last week. Prices are being pulled in both directions as bullish sentiment and news battle against the soaring US production.
OPEC’s decision on extending the supply cuts as well as group’s compliance rate so far has been the main supporter of prices. Prices saw further support from Forties pipeline (carries approximately 400 MBbl/d of crude from the North Sea to the Kinneil terminal in Scotland) being shut-down due to a crack in the system. Ineos, the operator of the Forties pipeline, said on Tuesday it was moving forward with repairs which could take up to four weeks. In the near term, Forties pipeline will continue to support Brent prices and could keep the WTI-Brent spread higher than the norm. The attempted missile attack on Saudi Arabia capital, Riyadh, from Yemen also briefly effected prices. Saudi Arabia said it intercepted the missile and no casualties were reported.
As prices are seeing support from Forties pipeline shutdown and OPEC extending the production cuts, they are also being pressured by the soaring US production. US production is expected to surpass 10 MMBbl/d in the beginning of 2018 and could grow further at a faster pace if the prices stay above $55/Bbl moving into 2018. Although OPEC supply cuts could potentially normalize the inventory levels in 2018, the growth in US production and a weaker demand could delay the normalization. The growth in US production puts Saudi Arabia in a tight corner, especially as US is approaching to produce at record levels, higher than Saudi Arabia.
OPEC will meet again in June 2018 to discuss and review the deal and start discussing an exit strategy and plans for 2019. It will be interesting to see what the group decides in order to reach the five-year average inventory levels, while the US increases its market share for crude production and surpassing Saudi Arabia.
There is still a lot of length to bullish speculative bets in the market because of the positive OPEC meeting outcome and continuing geopolitical issues in the Middle East and the temporary Forties pipeline shut-down. This leaves the market open for a large profit-taking rally. A lack of bullish results from inventory reports in the coming weeks and the possibility of increasing US and non-OPEC production in this recent prematurely higher price environment can shift focus back to fundamentals and reverse sentiment quickly.
The market has now held over $52.00/Bbl for over a month, establishing that as the low end of the new range. It is still critical that continued high quota compliance through 2018 along with the realization of the demand growth projected by the IEA occur concurrently for the market to have any chance to normalize inventories back to levels from prior to the price crash. Without inventory normalization, the price recovery cannot be sustained. Drillinginfo expects the trade to return to the previous range $52-$56/Bbl in the coming weeks as the speculative sector starts taking gains and fundamentals start to settle back in.