US crude oil stocks posted a small decrease of 0.5 MMBbl last week. Gasoline inventories increased 1.8 MMBbl and distillate inventories posted a decline of 4.2 MMBbl. Yesterday afternoon, API reported a crude oil build of 3.45 MMBbl alongside a gasoline build of 1.76 MMBbl and a distillate draw of 3.4 MMBbl. Analysts, to the contrary, were expecting a crude oil draw of 2.5 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted a sizeable decrease of 10.3 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.
US crude oil production remained unchanged last week, per EIA. Crude oil imports were up 30 MBbl/d last week, to an average of 7.4 MMBbl/d. Refinery inputs averaged 17.4 MMBbl/d (28 MBbl/d less than last week), leading to a utilization rate of 95.4%. The report is bullish due to the crude oil draw and large withdrawal in total petroleum stocks. Prices are being supported by the bullish report, while the growing concerns over a supply glut and slowdown in global economic and demand growth are pressuring prices. Prices could be pressured further if US Federal Reserve decides to increase the interest rates later in their meeting today. Prompt-month WTI was trading up $1.56/Bbl, at $47.80/Bbl at the time of writing.
Prices have been on a downward spiral since the beginning of the week, and tumbled on Tuesday, with nearly a 7 % loss that sent crude prices to their lowest in almost 16 months. Concerns over a global supply glut and slowdown in economic growth and energy demand have been pressuring prices. OPEC’s announcement that the group is planning to reduce supply levels by 1.2 MMBbl/d (~0.4 MMBbl/d from Russia & non-OPEC) gave almost no support to prices, as fundamentals point to a supply overhang moving into 2019.
Fears over a global supply glut intensified as Russia’s output reached historical levels at nearly 11.4 MMBbl/d in the month of December. EIA’s latest report showing US production reaching new and historically high levels also increased the bearish sentiment further. News around higher Russian production increased the skepticism regarding whether OPEC and non-OPEC producers (including Russia) will actually stay loyal to their quotas and whether the proposed supply cuts will be enough to balance the supply/demand levels.
The world’s top three producers (Russia, the US, and Saudi Arabia) all continue to increase production and produce at record levels; lower demand growth projections due to weakening economic growth and increasing doubts regarding whether OPEC supply cuts will be implemented or be effective even if they are successfully implemented have created the perfect bearish storm for prices, pushing them down to lowest levels in 16 months and breaking the $50/Bbl barrier. On the bullish side, Libya’s largest oil field, Sharara, has been shut down by a force majeure, as National Oil Company (NOC) expects a loss of nearly 315 MBbl/d. The news from Libya, although being bullish, had no effect on prices due to growing fears of a global supply glut.
The market sentiment remains bearish as fundamentals point to a large supply overhang. In order for the 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. With reports of increasing Russian production and the market questioning OPEC’s supply cuts, WTI broke below the $50/Bbl barrier, which previously seemed to have found buyers at these levels. The high end of the recent range has been limited to $54.55/Bbl. The potential high side of the range is $57.44/Bbl, which is unlikely without some additional positive news. 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.