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US crude oil stocks increased 6.3 MMBbl last week. Gasoline and distillate inventories decreased 4.8 MMBbl and 2.3 MMBbl, respectively. Yesterday afternoon, API reported a large crude oil build of 9.88 MMBbl, alongside gasoline and distillate draws of 2.8 MMBbl and 2.4 MMBbl, respectively. Analysts were expecting a smaller crude oil build of 3.7 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted a large decrease of 8.0 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.

US crude oil production remained unchanged last week, per EIA. Crude oil imports were up 63 MBbl/d last week, to an average of 7.7 MMBbl/d. Refinery inputs averaged 16.3 MMBbl/d (48 MBbl/d less than last week), leading to a utilization rate of 89.2%. The reaction to the report has been mixed, as crude oil posted yet another large build, while total petroleum stocks posted a significant decline. Prompt-month WTI was trading up $0.78/Bbl, at $67.33/Bbl at the time of writing.

Prices Gain Strength On Declining Product Inventories

Prices have retracted significantly in the past couple of weeks after reaching their four-year highs in the beginning of October. Last week’s sharp decline was followed by another sharp decline on Tuesday as both Brent and WTI fell nearly 5 %, with Brent falling to $75.88/Bbl (the lowest since September 7) and WTI hitting a two-month low at $65.74/Bbl. The decline in WTI prices on Tuesday was the largest daily drop since July 11.

Although the production loss anticipated due to Iranian sanctions and continuously declining Venezuelan production still remains intact, the fears of a supply shortage softened as OPEC (led by Saudi Arabia) and Russia started ramping up production. The bearish sentiment increased further on Monday after Saudi Energy Minister Khalid al-Falih said that Saudi Arabia has no intention of cutting back oil supply and would increase production to 11 MMBbl/d from current levels of 10.7 MMBbl/d. On Tuesday, he also said that the country still intends to increase production to offset the declines due to Iranian sanctions. The Saudis have done a complete 180 since the tensions started rising between the US and Saudi Arabia due to the disappearance of Jamal Khashoggi, where the Kingdom threatened to withhold production and increase prices to $100-$200/Bbl as retaliation if any action were taken against the Kingdom.

The sharp decline in prices was also partially due to the stock market weakness and continuous concerns over a slowdown in economic growth as well as demand growth due to ongoing trade disputes between the US and China. The rising economic and demand growth worries – and considering the latest news from Saudi Arabia, as they have assured the markets that the Kingdom will increase production to keep the world adequately supplied with crude – as well as increasing US and Russian production will put further pressure on prices moving forward. US sanctions on Iranian oil begin on November 4, which will remain as the main catalyst that will support prices. Any bullish headlines about the Khashoggi case and tensions between the US and Saudi Arabia may also support prices but it seems unlikely that the Saudi’s will change their stance again.

Price declines last week were met with increasing volumes, and the week closed below the commonly watched 20-week moving average. This action strongly suggested that further declines were to be expected early this week. The expectation of declines was met as prices fell below their major support level at the 200-day moving average, which was $67.32/Bbl. Further declines can be expected, as the market took a more bearish bias given comments by Saudi Arabia and fears of a weakening global economy and demand growth. Any positive headlines regarding the impacts of the sanctions and tensions around the Khashoggi case will likely push prices closer to the $70/Bbl range. However, continued US production growth and the expansion of Russian and Saudi Arabian production combined with fears of weaker demand growth lead Drillinginfo to believe the long-term range will occur between $60/Bbl-$65/Bbl.

Petroleum Stocks Chart

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