US crude oil stocks decreased by 4.5 MMBbl last week. Gasoline and distillate stocks posted an increase of 0.6 MMBbl and 1.1 MMBbl respectively. Yesterday afternoon, API had reported a crude oil draw of 6.0 MMBbl, while reporting gasoline and distillate builds of 3.1 MMBbl and 2.8 MMBbl respectively. Analysts were expecting a more modest crude withdrawal of 3.9 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted a sizable withdrawal of 8.8 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.
US production was estimated to be down 35 MBbl/d from last week per EIA’s estimate. Lower 48 and Alaska production declined by 24 MBbl/d and 11 MBbl/d respectively. Imports increased by 159 MBbl/d last week to an average of 8.0 MMBbl/d. Refinery inputs averaged 17.4 MMBbl/d (335 MBbl/d more than last week), leading to a utilization rate of 95.7%. The reaction to the report has been mixed but the bullish sentiment due to withdrawal in crude and total petroleum products was not enough to break the $60/Bbl barrier and overcome the profit taking rally. Prompt month WTI was trading down $0.08/Bbl at $59.56/Bbl at the time of writing.
WTI prices traded in the $58-$60/Bbl range last week. Prices reached $60/Bbl on Tuesday – their highest since June of 2015 – on reports of a pipeline explosion in Libya. Prices have also been getting support from the closure of Forties pipeline as well as OPEC supply cut extensions.
On Tuesday, armed forces blew up a pipeline carrying crude oil to the Es Sider port in Libya. The state-run National Oil Corporation (NOC) stated that output had been reduced by 70 to 100 MBbl/d. The supply disruption can be considered significant as Libya in November produced 973 MBbl/d according to OPEC’s latest report. The head of NOC stated that, repairs could take a week and supply disruption will not have a major impact on the exports. Although the disruption will be temporary, tightening oil markets led by the efforts of OPEC have amplified the effect of Libyan outage on crude prices.
The price rally was slightly muted by the news from Forties pipeline. The pipeline started operating at half of its capacity on Wednesday and its operator Ineos pledged that the pipeline would be operating at full capacity in early January. As oil markets have tightened with OPEC keeping a high compliance rate and extending the cuts, any bullish news or supply outages moving forward will have a larger impact on price movement.
General sentiment in the market remain bullish and is supported by the recent Libyan outage, Forties pipeline shutdown and OPEC’s extension on production cuts. However, inventory levels still being above the five-year average and soaring US production will keep the pressure on prices. US production is expected to surpass 10 MMBbl/d in the beginning of 2018 and could grow further 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.
There is still a lot of length to bullish speculative bets in the market especially with the most recent rally, and WTI reaching its highest level since June of 2015. 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 from the recent highs and fundamentals start to settle back in.