US crude oil stocks increased 1.9 MMBbl last week. Gasoline inventories increased 1.5 MMBbl while distillate inventories decreased 2.2 MMBbl. Yesterday afternoon, API reported a crude oil build of 2.9 MMBbl, while reporting a gasoline build of 0.9 MMBbl and a distillate draw of 0.9 MMBbl. Analysts, to the contrary, were expecting a crude oil draw of 1.28 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted an increase of 4.5 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 222 MBbl/d last week, to an average of 7.8 MMBbl/d. Refinery inputs averaged 16.5 MMBbl/d (901 MBbl/d less than last week), leading to a utilization rate of 90.4%. Prices gave up some of their gains from the 4-year high levels reached on Tuesday due to bearish inventory report as both crude oil and total petroleum products posted builds. Prompt-month WTI was trading down $0.45/Bbl, at $71.83/Bbl at the time of writing.
Prices traded above $70/Bbl last week and started this week very strong as both WTI and Brent reached their 4-year high levels on Tuesday. Prices have been increasing the last couple of weeks mainly on Iranian sanctions expectations and Iran’s export levels showing signs of declines. As the US sanctions on Iranian crude exports still loom, the results from the OPEC meeting in Algeria sent prices soaring.
The meeting between OPEC and some non-OPEC countries (including Russia) on Sunday ended with no formal agreement on any additional supply increases to offset possible declines from Iran and Venezuela in order to limit the gains in prices. Last week ahead of the meeting in Algeria, US President Donald Trump warned OPEC that they should increase production to get prices down. However, the outcome from the meeting was not in line with what President Trump was expecting, as Saudi Arabia and Russia rejected Trump’s requests in increasing production levels. OPEC stated that the group does not see a real need to increase production as inventory levels – although being down considerably – still are above the 5-year average.
Although the bullish sentiment in the market continues to increase along with prices, the threat of a slowdown in global economic growth and demand growth will put pressure on prices. The US-China trade dispute seems to be getting worse and could worsen before it gets better. The higher-price environment along with economic crisis in countries like Turkey and Egypt draws a gloomy picture for the global economic growth and demand for oil products. In addition to slowdown in demand growth, increasing US productions and the OPEC countries having enough spare capacity (if they chose to utilize) to offset supply declines from Iran and Venezuela will also pressure prices.
Prices did break above the $71/Bbl level and continued to increase to their 4-year highs. However, prices trading at a higher point are now facing pressure, as the market may find sellers taking advantage of the sudden uptick in prices.. The volatility will continue until the market develops a sense of what the supply and demand balance will look like longer term. Price declines will meet buying associated with the 200-day moving average (currently at $65.91/Bbl), which has been a consistent buying opportunity since last fall. The market needs additional bullish headlines to foster gains up to the June 2018 highs at $75/Bbl. The outcome of the weekend’s OPEC meeting certainly was one of these bullish headlines and could bring more strength to prices in the near term. When fundamental realities start to kick in, prices are likely to consolidate into a lower range. With the quota easement, continued US production growth, and fears of weaker demand growth, Drillinginfo believes the long-term range will occur between $58-$65/Bbl for an extended period of time.