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Insights across the energy value chain

US crude oil stocks decreased 5.8 MMBbl last week. Gasoline and distillate inventories increased 1.2 MMBbl and 1.8 MMBbl, respectively. Yesterday afternoon, API reported a crude oil draw of 5.17 MMBbl, alongside a gasoline draw of 0.93 MMBbl and distillate build of 1.80 MMBbl. Analysts were expecting a crude oil draw of 1.50 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted a decline of 2.5 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 up 100 MBbl/d from last week, per EIA. Crude oil imports were down 1.5 MMBbl/d last week, to an average of 7.5 MMBbl/d. Refinery inputs averaged 17.9 MMBbl/d (89 MBbl/d less than last week), leading to a utilization rate of 98.1%. The report is supporting the bullish sentiment due to the large crude oil withdrawal and total petroleum stocks showing a decline. Prompt-month WTI was trading down $1.67/Bbl, at $67.51/Bbl at the time of writing.

Prices Gain Strength With Crude Withdrawal

Prices traded in the $65/Bbl to $67/Bbl range, as they bounced back from the sharp decline to sub $65/Bbl last week. The support for prices came in before the expiration of September contracts and as Iran sanctions once again took the driver’s seat for bullish sentiment. Prices have been stuck between the supply shortage worry due to Iran sanctions that will come in effect in November and the concerns over the health of the global economy and demand growth. The trade war between the US and China has been the main catalyst threatening the demand growth and pressuring prices. Adding more pressure to prices was the meltdown in Turkey’s currency, as the devaluation of the Turkish Lira and its effects increased the bearish outlook for demand growth as the turmoil spread to other emerging countries.

Prices will continue to be volatile and tugged both ways until Iranian sanctions and trade disputes materialize and draw a clearer picture of supply and demand fundamentals. Although sanctions on Iran may cause global crude supply to decrease by 1 to 1.5 MMBbl/d, it will be unclear what the exact number and impact will be until the US government introduces the sanctions in November. The premise of a substantial supply cut will certainly be keeping a high floor for prices; however, if the global economy and trade disputes worsen, prices will be further pressured. Another factor that will affect prices will be the recent announcement from the US government that 11 MMBbl from the Strategic Petroleum Reserve (SPR) would be released. The announcement by the government is thought to minimize the effect of supply disruptions from Iran, while trying to push the gas prices down.

The price decline last week took prices down to the commonly watched 200-day moving average. This notable moving average has held the bull market since September 2017, and it was only challenged once in early October 2017. This average (currently $64.45/Bbl) will likely find buyers near term. However, should this resistance break, a significant amount of selling from both the speculators liquidating long positions and establishing new short positions will take prices down to the April lows of around $62/Bbl. The bounce off of the 200-day average may provide enough support to take prices back up to last week’s high around $68/Bbl. Due to the uncertainty surrounding the WTI market currently, the volatility driven by the unknown will be rampant. Eventually, after the volatility recedes and consolidation commences, the quota easement, continued US growth, and fears of a weaker demand growth lead Drillinginfo to believe that the supply and demand for crude may force a retracement of prices to settle in a zone of between $58/Bbl and $65/Bbl for an extended period of time.

Petroleum Stocks Chart

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