U.S. crude oil stocks posted a decrease of 2.7 MMBbl from last week. Gasoline and distillate inventories increased of 7.5 MMBbl and 3.0 MMBbl, respectively. Yesterday afternoon, API reported a crude oil draw of 0.65 MMBbl alongside gasoline and distillate builds of 6.0 MMBbl and 3.2 MMBbl, respectively. Analysts were expecting a crude oil withdrawal of 2.5 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted an increase of 5.0 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.
U.S. crude oil production was estimated to be up 200 MBbl/d from last week, per the EIA. Crude oil imports were down 319 MBbl/d last week, to an average of 7.5 MMBbl/d. Refinery inputs averaged 17.2 MMBbl/d (343 MBbl/d less than last week), leading to a utilization rate of 94.6%. The total petroleum stocks build, increasing US production, and global economic growth concerns are pressuring prices, while optimism around OPEC-led supply cuts are giving some support to prices. Prompt-month WTI was trading down $0.45/Bbl, at $51.66/Bbl at the time of writing.
Prices have been trading in the $50/Bbl to $52/Bbl range last week. Optimism from OPEC-led supply cuts and talks between US and China to resolve the trade disputes have helped prices recover from their recent collapse and continue to support prices. On Monday, prices fell nearly 2 percent, with China reporting import and export declines (most in two years) in December, which increased the fears of slowing economic growth and demand for crude-related products. However, bullish news came in quickly and helped WTI rise about 3 percent on Tuesday following news that China is planning to introduce policies to stabilize the slowing economy by fiscal stimulus.
Although fundamentals still point to a supply overhang, the recent OPEC production numbers and the group’s willingness to lower supply levels have increased the bullish sentiment. OPEC production fell nearly 0.6 MMBbl/d in December ahead of the official start date of supply cuts, which was January 2019. OPEC, with the aid of non-OPEC countries, led by Russia, is fully committed to execute the 1.2 MMBbl/d output cut to prevent the supply glut from continuing and to bring balance to the market. Saudi Arabia’s Energy Minister Khalid al-Falih’s comments also gave some support to prices, as he said that OPEC is on track with its compliance and he believes that the market will balance soon; he also added that he sees no need for an extraordinary OPEC meeting before April, which is when the group will decide its output policy for the remainder of 2019. On the bearish side, US-China trade disputes, although having the possibility of being resolved, are still pressuring prices. The US and China will have to decide by the March 2 deadline what the fate of trade disputes will be. The trade talks may support bearish sentiment near term, due to concerning reports by China showing large declines in exports and a lower economic growth projection for 2019, while the market awaits news about the trade dispute. On the U.S. side, the positive jobs number has somewhat calmed worries about an impending recession for the time being; however, increasing US production, is still pressuring prices.
Prices in the near term will be volatile as the market assesses the OPEC supply cuts and waits for a resolution of the trade disputes between the US and China. If a deal can be reached between the countries to eliminate the currently proposed tariffs on Chinese goods or to prevent any additional tariffs, global economic and demand growth could tick upward, which could support higher prices. However, if a deal cannot be reached and the Chinese economy continues to suffer, along with other emerging economies, sentiment could shift to bearish again regardless of the OPEC and non-OPEC supply cuts pressuring prices further.
Prices in WTI settled last week, up $3.63/Bbl after testing the highs from early December at $53.27/Bbl. Market internals had volume increasing during the rally. However, open interest declined during the week. If crude is to return to its aggressive price structure, there will need to be gains in open interest during the rallies. Unfortunately, the CFTC report is still not available, due to the government shutdown, leaving the market blind as to position structure among the sectors. Prices are now challenging an area of consolidation from last November and December between $49/Bbl and $54.55/Bbl. The rally off the lows has established a wider range of between $42/Bbl and $53/Bbl, which will likely hold the trade in the near term. The impacts of the production cuts and the changing demand dynamics (both seasonally and geopolitically) will dictate the direction of prices out of the range. Extensions downward could be driven by further stock builds and bearish news around economic growth. Extensions upward will be met with selling due to the rising stock numbers and would require a surprise reversal of the overhang in the first several months of the year. After the market fully assesses the fundamentals, longer-term prices will stabilize near the $55/Bbl levels.