Prices Increase After Highly Bullish Inventory Report

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US crude oil stocks posted a large decrease of 12.8 MMBbl from last week. Gasoline and distillate inventories decreased 1.0 MMBbl and 2.4 MMBbl, respectively. Yesterday afternoon, API reported a large crude oil draw of 7.5 MMBbl, alongside a gasoline draw of 3.2 MMBbl and a distillate build of 0.16 MMBbl. Analysts were expecting a much smaller crude draw of 2.8 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted a significant decrease of 11.9 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 last week, per the EIA. Crude oil imports were down 0.8 MMBbl/d last week, to an average of 6.7 MMBbl/d. Refinery inputs averaged 17.3 MMBbl/d (70 MBbl/d more than last week’s average), leading to a utilization rate of 94.2%. The report is very bullish due to large petroleum stocks withdrawal and higher-than-expected crude oil withdrawal. Prompt-month WTI was trading up $1.83/Bbl, at $59.66/Bbl, at the time of writing.

Prices Increase After Highly Bullish Inventory Report

Prices soared nearly 6% last Thursday, finishing the week up more than 9%, due to increasing tensions between the US and Iran and possible crude flow disruptions from the region. Although crude futures are still being supported by the US and Iran tensions, US President Donald Trump’s calling off a retaliatory attack on Iran as well as increasing concerns over weakening demand have slowed the price rally down until this morning, as prices sharply increased due to inventory data.

The drastic increase in prices last Thursday was largely due to Iran’s shooting down a US military drone, which resulted in President Trump stating on Twitter that Iran made a “very big mistake”; he later said that the public will “find out” if the US had plans to retaliate with a military strike. The tensions that started increasing between the US and Iran due to the US’s withdrawal from the 2015 Iran nuclear agreement and re-imposition of oil sanctions have been getting worse, with the US accusing Iran of the tanker attacks in the Strait of Hormuz. The drone attack and President Trump’s comments exacerbated the tensions between the countries and the risk of instability in the Middle East and will continue to be a bullish factor supporting prices. Also supporting prices was the weaker dollar, expectations that the US Federal Reserve may cut interest rates, and OPEC and its allies including Russia agreeing to meet on July 1-2 to discuss the fate of supply cuts, which is likely to be extended to the second half of the year.

The concerns around slowing global economic and demand growth will continue to pressure prices, as China continues to post disappointing growth figures and IEA in its latest report showed a downward revision of demand growth by 0.1 MMBbl/d in 2019. The market is awaiting the outcome of the potential meeting between President Trump and Chinese President Xi Jinping on the US–China trade wars. However, hope for an agreement to be reached is slowly fading away as the countries have been unable to reach an agreement for months now. The next couple of weeks will be critical for crude prices, as the G20 meeting and OPEC meeting will occur within a week of each other. A failure to reach an agreement with China will further dampen the economic and demand growth, pressuring prices further; meanwhile, a supply cut extension by OPEC will support prices on the supply side.

The market internals developed a short-term reversal and a neutral to bullish bias as prices rallied on strong volume but with declining open interest (normal for an expiring contract). The key for the WTI market will fall to the escapades in the Iran relationship. Should tensions escalate, further advances should be expected. The rally is subject to violent moves downward should the conflict be minimized. The rally last week ran into resistance from the breakdown level from the end of May, around $57.50/Bbl to $58.00/Bbl. With today’s bullish inventory data, prices will try to probe the $60/Bbl level ahead of the G20 and OPEC meetings, but may need additional support from bullish news around the US–Iran tensions as selling will occur in this area. What was resistance earlier last week, around $56.84/Bbl, will now become initial support for declines.

Petroleum Stocks Chart

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