US crude oil stocks decreased by 5.1 MMBbl last week. Gasoline stocks posted an increase of 5.7 MMBbl, while distillate stocks decreased by 1.4 MMBbl. Yesterday afternoon, API had reported a large crude oil draw of 7.4 MMBbl, alongside gasoline and distillate builds of 2.3 MMBbl and 1.6 MMBbl respectively. Analysts, were expecting a more modest crude withdrawal of 3.8 MMBbl. The most important number to keep an eye on, total petroleum inventories posted a withdrawal of 2.6 MMBbl. For a summary of the crude oil and petroleum product stock movements, see table below.
US production was estimated to be up 73 MBbl/d from last week per EIA’s estimate. Lower 48 and Alaska production increased by 65 MBbl/d and 8 MBbl/d respectively. Imports increased by 161 MBbl/d last week to an average of 7.4 MMBbl/d. Refinery inputs averaged 17.0 MMBbl/d (243 MBbl/d less than last week), leading to a utilization rate of 93.4%. The reaction to the report has been mixed, but the crude and total petroleum withdrawal has not offset the bearish increase in US production. Prompt month WTI was trading down $0.41/Bbl at $56.73/Bbl at the time of writing.
WTI prices traded in the $56-$58/Bbl range last week. Brent prices sharply increased on Monday following the news on Forties pipeline shutting down. Forties pipeline carries approximately 400 MBbl/d of crude from the North Sea to the Kinneil terminal in Scotland. The Pipeline shutdown pushed Brent prices to their highest levels in over two years, widening the WTI-Brent spread as much as $7 (the widest spread seen in over two years). On Tuesday prices gave up some of their gains, as the market took profits from the recent price rally.
Sentiment in the market remains bullish with Forties pipeline shutdown and OPEC extending the production cuts while putting an output cap on Nigeria and Libya with a combined 2.8 MMBbl/d. However, there are some factors working against the bullish sentiment. One factor being that Libya is already willing to increase production just two weeks after it pledged to cap its output. The Prime Minister of the UN-recognized Government of National Accord met with the heads of the National Oil Corporation and the Libyan central bank to discuss funding for increasing the output from Libya. Another factor is increasing US rig count and production. US production could be surpassing 10 MMBbl/d by the beginning of 2018.
The effects of the Forties pipeline shutdown will materialize in upcoming weeks. The pipeline shutdown may cause US oil exports to increase which would help drain inventories faster in the short term. However, it can also cause US producers to increase production further in-order to export more crude as WTI-Brent spread is significantly high. It is important to keep in mind that the pipeline shutdown will be temporary, a combined effect of US producers increasing production to meet this demand and Forties pipeline coming back on-line will have a negative effect on prices.
OPEC’s decision on extending the cuts will continue to support prices, while a lack of OPEC compliance including Libya increasing production will work against the OPEC deal. OPEC will meet again in June 2018 to discuss and review the deal and start discussing an exit strategy and plans for 2019.
There is still a lot of length to bullish speculative bets in the market because of the positive OPEC meeting outcome and continuing geopolitical issues in the Middle East. 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 and fundamentals start to settle back in.
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