US crude oil stocks increased by 2.4 MMBbl last week. Gasoline and distillate inventories decreased by 0.8 MMBbl and 0.6 MMBbl, respectively. Yesterday afternoon, API reported a large crude oil build of 5.7 MMBbl, a distillate build of 1.5 MMBbl and a gasoline draw of 4.5 MMBbl. Analysts were expecting a smaller crude oil build of 2.7 MMBbl. The most important number to keep an eye on, total petroleum inventory levels were unchanged. 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 86 MBbl/d from last week, per EIA. Crude oil imports increased by 721 MBbl/d last week, to an average of 8.0 MMBbl/d. Refinery inputs averaged 15.9 MMBbl/d (53 MBbl/d more than last week), leading to a utilization rate of 88%. The report is bearish, as crude oil posted a decline and gasoline inventory draw was smaller than expected. Prompt-month WTI was trading down $0.29/Bbl to $62.31/Bbl at the time of writing.
WTI prices traded in the $61/Bbl-$63/Bbl range last week. Prices were pressured by the weakness in global financial markets after the resignation of President Trump’s economic advisor, Gary Cohn. Increasing US production also pressured prices, while supply outages and a new report released by IEA gave some support to prices.
Cohn’s resignation came after his stance against Trump’s planned 25% import tariff on steel and aluminum imports. Trump’s tariff plan raised the concerns of a possible trade war, which affected the global markets and oil prices as well. Global Leaders including EU and China have said Trump’s planned tariffs could lead to retaliatory action and cause a global trade war, which would be detrimental to economic growth and oil consumption. Cohn’s resignation could be interpreted as meaning Trump will move forward with his decision. Even if the new plan does not spark a global trade war, it will still drastically impact the US shale industry and could act as the main catalyst in slowing down US production growth right when the US is set to pass Russia and become the top oil producer in the world.
The US oil industry is heavily dependent on imported steel, as steel used in oil pipelines and drilling activities must meet technical specifications; currently, more than three-quarters of pipelines in the US depend on imported steel. Pipeline takeaway capacity in the more prolific producing regions is already an issue and needs to be solved by adding new pipelines so additional product can hit the markets. A 25% cost increase in tariffs could lead to the delay or cancellation of these projects, which ultimately would mean one thing: US oil output slowing down just as it is set to surpass Russia’s. Russia and OPEC would be the biggest winners, as US production growth would be limited.
Prices got some support from the supply outages in Libya, with IEA stating they expect a strong oil demand growth, projecting a rise of 6.9 MMBbl/d by 2023. More than half is projected to come from India and China. IEA also stated that in the same time frame, US supply could grow by 3.7 MMBbl/d, OPEC could see growth of 0.75 MMBbl/d, and Venezuela could account for a 0.7 MMBbl/d decline. The demand growth projected is certainly supporting prices; however, the supply/demand picture could shift quickly depending on production levels for OPEC and Venezuela.
The market seems to be constructing a range ($58/Bbl-$64/Bbl) in the near term. Realization of longer-term supply/demand imbalance potential could have the market testing the lower end of the range. While additional news regarding OPEC quotas, inventory normalization, or temporary supply disruptions due to geopolitical issues might create short-term price gains and volatility, 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 back to their levels prior to the price crash, it is critical that high quota compliance continue through 2018 and that the demand growth projected by IEA occur concurrently. Without inventory normalization, the price recovery cannot be sustained. Drillinginfo expects prices to return to a less speculative price level, settling in a range around $55/Bbl in the longer term.
Please find the updated Drillinginfo charts on the link below: