US crude oil stocks decreased 2.6 MMBbl last week. Gasoline and distillate inventories decreased 1.6 MMBbl and 0.8 MMBbl, respectively. Yesterday afternoon, API reported a crude oil build of 38 MBbl, alongside gasoline and distillate builds of 21 MBbl and 0.98 MMBbl, respectively. Analysts were expecting a crude oil draw of 0.52 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted a decline of 1.7 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 down 67 MBbl/d from last week, per EIA. Crude oil imports were down 33 MBbl/d last week, to an average of 7.5 MMBbl/d. Refinery inputs averaged 17.6 MMBbl/d (326 MBbl/d less than last week), leading to a utilization rate of 96.3%. The report is supporting the bullish sentiment due to the higher-than-anticipated crude oil withdrawal as well as total petroleum stocks showing a decline. Prompt-month WTI was trading up $0.75/Bbl, at $69.28/Bbl at the time of writing.
Prices traded in the $67/Bbl to $69/Bbl range, as they continued their upward trend over the last few weeks with expectations of a global supply disruption due to approaching Iranian sanctions, declining Venezuelan production, and instability in Libya and Nigeria.
Prices are still being pulled in both directions by the expectations of a supply shortage and weakening health of global economy and demand growth. The expectations of a tighter market due to upcoming Iranian sanctions and continuously declining Venezuelan production have been supporting prices for a while but have been mostly muted with the demand growth risk due to the trade disputes. However, supply disruptions took precedence as IEA warned of further production falls in Venezuela as well as characterizing Libya and Nigeria as fragile in terms of their production capabilities. The support for prices from the upcoming Iranian sanctions is also increasing, as the due date for the second round of sanctions (November) approaches. Although it is too early to gauge what the real impact of Iranian sanctions will be to the global supply levels, the market is anticipating supply to decrease by 1 to 1.5 MMBbl/d. In addition to the support from possible supply disruptions, the dollar losing strength in the last couple of weeks is also supporting prices.
Even though bullish sentiment remains strong with the possibility of losing substantial supply, there are still some catalysts on the bearish side that will pressure prices. Continuously increasing US production is one of the main catalysts. US producers have not showed signs of slowing down given the higher price environment and healthier balance sheets. The Permian Basin, which is where most of growth is expected from, is currently facing a pipeline takeaway capacity issue that may limit the growth until latter part of 2019. However, some producers are allocating CAPEX in other basins as they wait for pipelines in Permian, and will be ramping up production once the problem is alleviated. Higher production from OPEC and Russia is another factor that will pressure prices, as they have agreed to ramp up production to offset the declines from Venezuela and Iran. In addition to rising production from US, OPEC, and Russia, the ongoing trade wars will also keep a lid on prices as they may slow down the demand growth and overall global economic growth. The supply and demand growth uncertainty will keep prices volatile, and higher volatility could be expected after the rumors about Saudi Aramco’s IPO being cancelled.
As explained in last week, the price decline from the previous week took prices down to the 200-day moving average, and a rebound from that level was to be expected. This notable moving average has held the bull market since September ’17 with it being challenged only once in early October ’17. This average (currently $64.74) will likely hold near-term declines. However, should this area break down, a significant amount of selling, from both the speculators liquidating and new short positions coming in, will take prices down to the April lows of around $62/Bbl. The rebound off the test of the average took prices over $69/Bbl briefly, only to retrace at the end of the week. Expect the high end of the recent range (either side of $70/Bbl) to find sellers until the market defines the fundamental implications described above. One element to trade will be the continued volatility and any bullish or bearish headlines on the day trade. As the market loses its uncertainty later in the year, volatility will recede and prices will start to consolidate in a lower range. The quota easement, continued US growth, and fears of a weaker demand growth lead Drillinginfo to believe this range to be $58/Bbl-$65/Bbl for an extended period of time.