US crude oil stocks increased by 3.3 MMBbl last week. Gasoline inventories increased by 0.5 MMBbl, while distillate inventories posted a decline of 1.0 MMBbl. Yesterday afternoon, API reported a crude oil build of 1.8 MMBbl alongside a gasoline build of 2.0 MMBbl and a distillate draw of 3.8 MMBbl. Analysts, to the contrary, were expecting a modest crude oil draw of 0.19 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted a sizable increase of 6.0 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 65 MBbl/d from last week, per EIA. Crude oil imports increased by 752 MBbl/d last week, to an average of 8.7 MMBbl/d. Refinery inputs averaged 17.0 MMBbl/d (83 MBbl/d more than last week), leading to a utilization rate of 93.5%. The report is bearish, due to larger-than-expected crude oil build as well as sizable total petroleum stocks build. However, prices rallied to their three-year highs with increasing geopolitical tensions and following President Trump’s tweets stating Russia had better “get ready” for US missiles in Syria in response to the chemical attacks. Prompt-month WTI was trading up $1.55/Bbl to $67.06/Bbl at the time of writing.
WTI prices traded in the $62-to-$64/Bbl range last week, and Tuesday they skyrocketed above $65/Bbl. WTI on Tuesday settled at two-week highs, while Brent reached the $70/Bbl physiological mark and was at its highest since 2014. The price rally was due to Trump’s remarks on responding to chemical attacks on Syria. The easing of US-China trade tensions for now, as well as reintroduction of Iranian sanctions, also contributed to the price rally.
The fear of a trade war between the US and China that pressured prices over the past couple of weeks was softened as US officials and China changed their tone on tariffs. Chinese President Xi Jinping promised on Tuesday to open China’s economy further and lower import tariffs on cars, which was one of the main catalysts of the recent price rally. Another catalyst helping the price rally is the recent chemical attack carried out by Syria and responses from major forces across the globe. Following the attack, Trump announced that the US would forcefully respond to these attacks, which was followed by comments from Saudi Arabia, Qatar, and France that they also would be involved in the response. Russian comments on the matter — that the US carrying out military action in the area could result in grave repercussions — increased the tension.
In addition to geopolitical tensions increasing further, declining Venezuelan production, Saudi Arabia stating it is aiming for $80/Bbl ahead of the IPO of Saudi Aramco, and the possibility of the US withdrawing from the Iran nuclear deal are still supporting the bullish sentiment. Withdrawal from the Iranian nuclear deal could mean reimplementation of Iranian sanctions, which would drastically lower crude output from Iran, currently the third-largest OPEC producer.
Although prices have rallied to multiple-week highs, the fundamental picture remains the same, as the price rally is mainly due to increasing geopolitical tensions and speculative trading on bullish news. The US rig count continues to climb, and production is still on track to surpass 11 MMBbl/d before the end of the year. Production could grow even faster if speculative bullish news continues to cause short-term price gains, which will further increase US producers’ appetite for higher production. Sentiment could shift to bearish quickly if the US and China backpedal from their recent view on tariffs and start the fears of a trade war again, which would jeopardize the strong demand growth projections that support the supply/demand balance and price recovery.
The fading trade war fears and geopolitical tensions brought the speculators back in trade as expected. The bullish news will continue to support prices in the near term and could test new highs above $66/Bbl. This could leave the market open for a major sell-off if sentiment shifts to being more bearish, causing the speculatively induced trade to leave its place to fundamentals and cause a correction. While additional news regarding OPEC quotas, inventory normalization, or temporary supply disruptions due to geopolitical issues could cause short-term price gains and volatility to continue, the promise of additional growth from US producers is likely to limit longer-term extensions. For the market to have any chance of normalizing inventories to levels seen prior to the price crash, it is critical that high quota compliance continue through 2018 and the demand growth projected by IEA occur concurrently. Without inventory normalization, the price recovery cannot be sustained. Drillinginfo believes that the market will eventually refocus on the fundamental realities and expects prices to retreat to a range around $55/Bbl.
Please find the updated Drillinginfo charts on the link below:
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