US crude oil stocks increased 3.2 MMBbl last week. Gasoline and distillate inventories decreased 3.2 MMBbl and 4.1 MMBbl, respectively. Yesterday afternoon, API reported a large crude oil build of 5.69 MMBbl alongside gasoline and distillate draws of 3.5 MMBbl and 3.1 MMBbl, respectively. Analysts were expecting a crude oil build of 4.1 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted a decrease of 6.4 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.
US crude oil production increased 300 MBbl/d (federal offshore recovery) last week, per EIA. Crude oil imports were down 334 MBbl/d last week, to an average of 7.3 MMBbl/d. Refinery inputs averaged 16.4 MMBbl/d (149 MBbl/d more than last week), leading to a utilization rate of 89.4%. The reaction to the report has been mixed, as crude oil posted yet another — although smaller than expected — build, while total petroleum stocks posted a significant decline. Prompt-month WTI was trading up $0.46/Bbl, at $66.64/Bbl at the time of writing.
Prices continued their downward spiral and traded in the $66-$68/Bbl range last week. On Tuesday, prices fell to their 10-week low as rising supply and inventory levels, trade disputes, and worries about economic growth and demand for crude have weighed on prices and shifted sentiment. Crude oil prices are on track to have their worst monthly performance since mid-2016, as both benchmarks have fallen more than $10/Bbl from their fresh four-year highs in early October.
It was only a couple of weeks ago that prices reached their four-year highs on the expectation of a supply shortage due to Iranian sanctions and declining Venezuelan production. Although Iranian production and exports have showed declines, there was always a lingering skepticism around what the true impact of sanctions would be when they are put in place on November 4 and what other countries besides the US would be partaking in cutting imports from Iran. As prices rose, the US government pushed OPEC (Saudi Arabia) to increase production to offset declines and bring prices down. Saudi Arabia played hardball for a while, stating that they will not be increasing production; however, a couple of weeks ago, Saudi Arabia, along with Russia, announced that they would be ramping up production. Saudi Arabia also stated that they will do whatever it takes to keep the world adequately supplied with crude and to offset production declines. Since then, both OPEC (led by Saudi Arabia) and Russia have been increasing production rapidly and OPEC production has been rising despite the declines from Iran and Venezuela. Higher supply levels from OPEC, Russia, and the US have helped shift the sentiment from bullish to bearish in the past couple of weeks. Nigeria and Libya also have increased production in the past couple of months, which has contributed to higher supply levels.
In addition to higher supply, concerns over global economic and crude demand growth have also caused the sentiment to shift to where, in just a couple of weeks, the market went from being worried about a supply shortage to being concerned about a global oversupply scenario. Global economic and demand growth worries particularly have increased as US-China trade disputes have worsened, and higher prices, which have already put a dent in fuel and crude demand, could worsen with the ongoing trade disputes and economic crises in emerging economies. Prices were further pressured from the demand perspective, as the IEA, in its latest report, revised down its demand forecast for 2018 and 2019.
US sanctions on Iranian crude will be put in place in less than a week. Unless the sanctions have a dramatic impact on Iran’s production and OPEC changes its stance in offsetting these declines, the world could be entering another era of oversupply, especially factoring in the gloomy economic and demand growth. The market will be closely watching any news related to Iranian sanctions and the overall impact on the global supply levels, and prices will continue to be pressured until Iranian sanctions prove to be effective.
Last week’s declines took prices below the commonly watched 200-day simple moving average for the first time since September 2017. Once this key area of support was broken on Tuesday, it was then tested as resistance ($67.44/Bbl) on Wednesday through Friday. This level was broken this week as prices fell to their 10-week lows. Should prices get above this level due to any bullish headlines and data showing significant declines in Iranian production, look for the high of last week ($69.66/Bbl) as the top of the gains in the near term. Further declines will target the August low of $64.33/Bbl. Continued US, Russian, and Saudi Arabian production growth, coupled with fears of weaker demand growth, lead Drillinginfo to believe the long-term range will occur between $60/Bbl-$65/Bbl for an extended period of time.
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