US crude oil stocks posted a decrease of 1.2 MMBbl last week. Gasoline inventories increased 2.1 MMBbl while distillate inventories posted a decline of 1.5 MMBbl. Yesterday afternoon, API reported a large crude oil draw of 10.18 MMBbl alongside a gasoline draw of 2.5 MMBbl and a distillate build of 0.71 MMBbl. Analysts were expecting a smaller crude oil draw of 2.99 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted a decrease of 6.0 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.
US crude oil production decreased 100 MBbl/d ast week, per EIA. Crude oil imports were up 174 MBbl/d last week, to an average of 7.4 MMBbl/d. Refinery inputs averaged 17.4 MMBbl/d (51 MBbl/d less than last week), leading to a utilization rate of 95.1%. Crude oil withdrawal and temporary supply outages in Libya are supporting prices. Meanwhile growing concerns on OPEC’s supply cuts not being enough to compensate the supply overhang and a slowdown in global economic and demand growth are pressuring prices. Prompt-month WTI was trading up $0.41/Bbl, at $52.06/Bbl at the time of writing.
Prices traded in the $51/Bbl-$53/Bbl range last week. The OPEC meeting boosted prices on Friday, as the group announced it will lower overall production by 0.8 MMBbl/d from October levels for six months starting in January. OPEC also announced that Russia and non-OPEC countries in a joint effort will reduce production by 0.4 MMBbl/d in the same time frame, which brings the total supply-cut level to 1.2 MMBbl/d.
The increase in prices due to OPEC’s meeting failed to extend gains in to this week. The market’s anticipation of a higher supply cut and the growing concerns over a slowdown in global economic growth and energy demand pressured prices downward, offsetting the gains on Friday. Prices saw further pressure on Tuesday as Russia’s remarks on cutting oil output by 50-60 MBbl/d in January and gradually reaching 220 MBbl/d increased the skepticism about whether the country will stick to its commitment and reach that number. On the bullish side, prices got support from a shutdown in production in Libya, where the National Oil Company (NOC) declared force majeure on exports from the country’s largest field, El Sharara, due to an attack by a militia group. NOC stated the force majeure would result in a total loss of nearly 400 MBbl/d. This recent news from Libya will provide some support for prices in the near term.
Although OPEC formally announced the highly anticipated supply cuts, the fundamentals currently remain the same and point to supply overhang moving into 2019, as the world’s top three producers (Russia, the US, and Saudi Arabia) all are still producing at record levels and demand growth projections remain weak. In order for supply overhang to reverse course, OPEC and non-OPEC countries, including Russia, will need to stay loyal to proposed supply cuts and execute on them, while demand for oil products needs to increase.
The positive gains at the end of the week relieved some of the oversold conditions within the trade. Expect the market to consolidate the past five weeks’ bearish collapse in prices and develop a new range for prices for the remainder of 2018. The high side of the range has $57.44/Bbl, providing significant selling, while the lows from October 2017 ($49.18/Bbl) will find buying in the near term as the market digests the recent fundamental adjustment to expectations. Drillinginfo continues to believe the long-term range for prices will occur between $60/Bbl and $65/Bbl after the market fully digests the global supply and demand profile. Getting to that fundamental understanding will take an extended period of time, during which the near-term range, between $51/Bbl and $61/Bbl, will hold the trade.