US crude oil stocks increased by 5.0 MMBbl last week. Gasoline and distillate inventories decreased by 6.3 MMBbl and 4.4 MMBbl, respectively. Yesterday afternoon, API reported a crude oil build of 1.2 MMBbl, while reporting gasoline and distillate draws of 1.5 MMBbl and 4.3 MMBbl, respectively. Analysts were expecting a crude oil build of 2.0 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted a decrease of 4.5 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 12 MBbl/d from last week, per EIA. Crude oil imports decreased by 418 MBbl/d last week, to an average of 7.6 MMBbl/d. Refinery inputs averaged 16.4 MMBbl/d (432 MBbl/d more than last week), leading to a utilization rate of 90%. The reaction to the report has been mixed, as bullish sentiment from large product withdrawal and Tillerson’s departure from the White House are working against the bearish sentiment from a significantly large crude oil build. Prompt-month WTI was trading down $0.08/Bbl to $60.63/Bbl at the time of writing.
WTI prices traded in the $60/Bbl-$62/Bbl range last week. Prices started the week under pressure, with EIA’s latest report showing strong US production growth expectations. Prices initially saw further pressure on Tuesday due to the stock market’s reaction to President Trump’s firing of Secretary of State Rex Tillerson but quickly recovered as Tillerson’s departure could be a bullish development due to his stance on the Iran nuclear deal and Venezuela sanctions.
Crude prices are being pulled in both directions, with various bullish and bearish news weighing in on prices. Continuously increasing US production levels are the main catalyst for the bearish sentiment. In its latest report on Monday, EIA stated that shale production in the US would rise to its highest level in April and was expected to surpass 11 MMBbl/d in late 2018. President Trump’s latest firing spree, which includes his economic advisor Gary Cohen, followed by Tillerson, also led to some uncertainty and put pressure on prices as the stock market took a hit in reaction to President Trump’s decisions.
On the bullish side, prices are being supported by temporary supply disruptions in Libya, by Tillerson’s surprise departure from office and its effect on the Iran nuclear deal, by continuing OPEC supply cuts, and by the Saudi Aramco IPO possibly being delayed until 2019. The Libyan port of Zawiya, which exports 308 MBbl/d of crude stopped loadings due to a strike, which will temporarily support prices. Although Tillerson’s departure negatively affected the stock markets, it may support prices in the long term due to Tillerson’s stance on the Iran nuclear deal. Tillerson’s departure may lead to a return of restrictions on Iran’s oil exports and further investment to the country, which could lead to an increase in prices. Rumors surrounding Saudi Aramco’s IPO being delayed until 2019 could also help support prices. The Saudis are aiming for a price of ~$70/Bbl to increase the valuation of Saudi Aramco ahead of the IPO, and the current environment is not supporting those levels.
The speculative-based run in prices is coming to an end with the realization of longer-term supply/demand imbalance potential. 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 to their levels 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 expects prices to return to a less speculative level, settling in a range of around $55/Bbl in the longer term.
Please find the updated Drillinginfo charts on the link below:
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