US crude oil stocks posted a large increase of 10.3 MMBbl last week. Gasoline and distillate inventories decreased 1.4 MMBbl and 3.6 MMBbl, respectively. Yesterday afternoon, API reported a large crude oil build of 8.8 MMBbl, while reporting a gasoline build of 0.18 MMBbl and a distillate draw of 3.2 MMBbl. Analysts were expecting a smaller crude oil build of 3.0 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted a decrease of 1.4 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.
US crude oil production increased 100 MBbl/d last week, per EIA. Crude oil imports were down 87 MBbl/d last week, to an average of 7.5 MMBbl/d. Refinery inputs averaged 16.4 MMBbl/d (24 MBbl/d more than last week), leading to a utilization rate of 90.1%. The reaction to the report has been mixed as significant crude oil build is pressuring prices, while the decline in total petroleum stocks and news regarding OPEC and Russia potentially introducing supply cuts in 2019 are giving support to prices. Prompt-month WTI was trading up $0.66/Bbl, at $56.91/Bbl at the time of writing.
Prices extended their losses and sank on Tuesday dipping below the $56/Bbl mark to their lowest year-to-date. WTI prices have now fallen for 12 consecutive sessions. This is the longest losing streak for WTI since it started being traded on the New York Stock Exchange. Both benchmarks have fallen more than 20 percent since hitting their four-year highs in early October. The WTI market has now shifted its sentiment to bearish, flipping from being a speculator-driven bull market due to anticipation of a supply shortage from Iranian sanctions to being a fundamentally oversupplied market due to rapidly rising supply levels and a weaker demand growth.
The announcement of Iranian sanctions gave no support to prices; to the contrary, it drove them down due to the temporary waivers granted to eight countries (China, India, Japan, Italy, Greece, Turkey, South Korea, and Taiwan). This decision by the US government caused a shift in sentiment, as OPEC and Russia had agreed in June to produce more crude in order to offset the anticipated declines by Iranian sanctions. OPEC (led by Saudi Arabia) and Russia have increased production to historical levels since then. US production has also increased to historical highs, which is also contributing to the supply surplus. The rising supply levels from OPEC, Russia, and the US, as well as a weaker demand outlook, now have the market convinced that a supply glut will materialize moving into 2019.
Although OPEC and Russia had agreed to increase output, the recent price crash caused them to backtrack and possibly reverse their decision in 2019. On Sunday, OPEC and Russia signaled a potential joint production cut in order to prevent a global supply glut. However, a decision was not made, as Russia’s energy minister, Alexander Novak, said it was too early to make a decision to reverse course. OPEC will be re-grouping in Vienna on December 6 to discuss and determine its next move in terms of potential supply cuts.
Although news about OPEC potentially reducing supply levels was a bullish headline, it had no effect on prices, instead prices saw further declines following a tweet from President Donald Trump urging Saudi Arabia and OPEC to stay the course and continue producing to keep the oil prices down Another factor that pressured prices despite the bullish OPEC headline was OPEC projecting significantly less demand growth in 2019, just like IEA has projected, which led prices down to their lowest level of the year.
New selling from the speculative shorts and an increase in producer selling have pressured prices into extremely over-sold levels. Prices already dipped below the lows of 2018, falling below $56/Bbl. This type of selling usually abates with prices likely to bounce off the lows and retrace some of last week’s declines. The highs of last week at $64.14/Bbl are the first target, while the respected 200-day average of $67.36/Bbl will be challenged next. Prices will continue to be under pressure with the current global supply levels and a weaker demand growth. The bullish headlines, such as OPEC supply cuts or anything relating to Iranian production declines, will give support to prices. Regardless of any bounce, the market has lost a significant amount of its bullish bias. Drillinginfo continues to believe the long-term range will occur between $60/Bbl and $65/Bbl for an extended period of time, with the short-term range being between $55/Bbl and $60/Bbl as market waits to hear news from the next OPEC meeting.