US crude oil stocks declined 1.4 MMBbl last week. Gasoline and distillate inventories declined 3.8 MMBbl and 0.1 MMBbl, respectively. Yesterday afternoon, API reported a crude oil build of 4.9 MMBbl alongside gasoline and distillate withdrawals of 3.37 MMBbl and 0.76 MMBbl, respectively. Analysts, on the contrary, were expecting a crude oil draw of 0.76 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, declined by 0.7 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 20 MBbl/d from last week, per EIA. Crude oil imports were up 278 MBbl/d last week, to an average of 7.6 MMBbl/d. Refinery inputs averaged 16.6 MMBbl/d (149 MBbl/d more than last week), leading to a utilization rate of 91.1%. The reaction to this report has been mixed, as bullish sentiment from crude and total petroleum inventory withdrawals is offset by IEA’s lower demand growth projections in its latest report. Prompt-month WTI was trading down $0.22/Bbl at $71.09/Bbl at the time of writing.
Prices traded in the $70-$72/Bbl range last week, and remained volatile while the market is trying to digest and understand what the impact of renewed Iranian sanctions will be on supply and prices. As previously stated, it will take at least 6 months for US sanctions to come into effect, which means the timing may coincide with the expiration of OPEC’s supply cut quotas. The impact of Iranian sanctions on supply may not be as drastic as anticipated if other US allies continue waiving sanctions on Iran, and OPEC decides to close the supply gap created by US sanctions.
Nonetheless, the market remains bullish, as the perfect storm has already been created through a tightening oil market due to OPEC’s high compliance, Venezuela’s continuously declining production levels, renewed Iranian sanctions and rising tensions in Middle East. Even though the catalysts of the perfect storm will continue to support prices, and could push prices higher in the near term, there is still the risk that some OPEC producers will increase production and reduce compliance levels while taking advantage of the higher prices. Saudi Arabia will be one of the only countries that will strive for higher prices in the risk of producing at lower levels, as its goal is for Saudi Aramco to IPO at the highest price levels possible.
As previously mentioned many times, global demand growth is significant to the price recovery and sustainability. In its latest monthly report, IEA stated it expects a slowdown in global demand growth largely attributable to higher prices, and revised down its forecast for to 1.4 MMBbl/d, from a previous estimate of 1.5MMBbl/d. Higher prices will not only continue to lower the demand growth projections, but will also incentivize US producers to expand their CAPEX and increase production levels even further. The current WTI level is more than enough to increase US producers’ appetites, but incentivizing them more is the current wide price spread between Brent and WTI. US producers could increase production further to take advantage of multi-year high Brent levels, and fill the demand from Europe and Asia with the soaring shale growth.
The geopolitics, declining Venezuelan production and anticipation of a large supply cut from Iran will keep prices volatile in the coming weeks and months. However, given that US production growth and currently curtailed OPEC production are sufficient to meet demand growth next year, even with Venezuelan declines and a squeeze on Iranian exports, fundamentals dictate that prices do not have any reason to climb further. The speculative longs — high off the recent runup to $70/Bbl — however, may extend this run further on the uncertainty surrounding all the dynamics in the market. It looks as if prices are going to stay in the $66-$73/Bbl range for a period of time. This type of range will provide an environment for the market to thoroughly assess the supply and demand picture without the speculative noise that has carried prices for past few months, before finding a lower equilibrium. Drillinginfo believes that the lower equilibrium, which will be driven by the supply-demand fundamentals, would result in a range around $65/Bbl.
Please find the updated Drillinginfo charts on the link below:
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