US crude oil stocks increased 6.5 MMBbl last week. Gasoline and distillate inventories decreased 2.0 MMBbl and 0.8 MMBbl, respectively. Yesterday afternoon, API reported a crude oil draw of 2.13 MMBbl alongside gasoline and distillate draws of 3.4 MMBbl and 0.25 MMBbl, respectively. Analysts, to the contrary, were expecting a crude oil build of 2.2 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted an increase of 3.0 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.
US crude oil production decreased 300 MBbl/d last week, per EIA (shut-ins due to Hurricane Michael). Crude oil imports were up 218 MBbl/d last week, to an average of 7.6 MMBbl/d. Refinery inputs averaged 16.3 MMBbl/d (77 MBbl/d more than last week), leading to a utilization rate of 88.8%. The report is bearish, as both crude oil and total petroleum stocks posted builds. The bearish inventory report as well as Iranian and Venezuelan production declines being offset by increasing OPEC and Russian production are pressuring prices. Prompt-month WTI was trading down $1.90/Bbl, at $70.02/Bbl at the time of writing.
Prices have gained some strength after dropping nearly $4/Bbl last week and traded in the $71-$72/Bbl range. The large drop in prices was mainly due to growing US crude inventories as well as OPEC production increasing despite declining Venezuelan and Iranian production. Increasing tensions between the US and Saudi Arabia due to the disappearance of Saudi Arabian journalist Jamal Khashoggi have increased the bullish sentiment and could significantly affect prices if the situation does not get resolved.
The Iranian sanctions and declining Venezuelan production are still supporting prices, and they will continue to do so, as Iranian production has declined faster than anticipated, with exports from Iran in the first two weeks of October hovering near 1.5 MMBbl/d versus 2.5 MMBBl/d in April. It is still unclear how much more supply Iran will lose when sanctions are put in place in November as India, China, Turkey, and some EU countries may continue importing crude from Iran. In addition to lingering worries about supply from Iran and Venezuela, prices also got support from the growing tensions between the US and Saudi Arabia. The disappearance of Khashoggi, who was last seen in Turkey, has been allegedly tied to the Saudi government, which has strained US-Saudi relations and provoked an international outcry. The Saudi government denied the claims and further warned that it could withhold production and push oil prices to $100 or $200/Bbl if any action is taken against the Kingdom due to the disappearance of Khashoggi.
Saudi Arabia’s warning certainly increased the bullish sentiment in the market; however, it may be unlikely Saudi Arabia will withhold production in order to increase prices, as this could lead other countries like the US and Russia to strive to grab market share from Saudi Arabia.
As prices continue seeing support from bullish headlines and anticipated Iranian sanctions, any significant price gains will be limited due to OPEC and Russia increasing production as well as US production’s continuous growth, as EIA stated that shale production in November will reach record levels. In addition to higher production from OPEC, Russia, and the US, the ongoing US-China trade disputes and a weaker demand expectation due to trade wars and a higher price environment will put further downward pressure on prices.
Price declines last week were met with a volume increase and should be expected to continue early this week; prices closed last week just off the lows. Further declines will likely take prices to the first area of support at the commonly traded 20-week moving average ($69.52), with major support at the 200-day moving average, which is now at $67.09. Positive headlines — especially if US-Saudi tensions increase — will likely allow for a test of the high end of the range, starting at last week’s high ($75.28) all the way to the highs two weeks ago at $76.90. With clouds still hanging over the WTI market, the volatility will likely continue. When all the issues regarding the sanctions and OPEC potentially offsetting lost crude production are resolved, prices are likely to settle out before the end of the year and consolidate into a lower range. The continued US production growth, the expansion of Russia and the Saudis, and the fears of weaker demand growth lead Drillinginfo to believe the long-term range will be between $60/Bbl-$65/Bbl for an extended period of time.