US crude oil stocks decreased by 1.1 MMBbl last week. Gasoline and distillate inventories decreased by 3.0 MMBbl and 3.1 MMBbl, respectively. Yesterday afternoon, API reported a crude oil draw of 1.05 MMBbl while reporting gasoline and distillate draws of 2.5 MMBbl and 0.85 MMBbl, respectively. Analysts were expecting a crude oil draw of 1.4 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted a significantly large draw of 10.6 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 25 MBbl/d from last week, per EIA. Crude oil imports decreased by 720 MBbl/d last week, to an average of 7.9 MMBbl/d. Refinery inputs averaged 16.9 MMBbl/d (70 MBbl/d less than last week), leading to a utilization rate of 92.4%. The report is bullish, due to crude oil withdrawal and significantly large total petroleum stock withdrawal. Prices climbed above their three-year highs following the EIA report. Prompt-month WTI was trading up $1.26/Bbl to $67.78/Bbl at the time of writing.
WTI prices traded in the $66-to-$68/Bbl range last week. Prices rose to their highest weekly close since November 2014 ahead of the weekend on anticipation of US air-strike response to chemical attacks on Syria and their possible broader implications. Prices retracted some of their gains at the beginning of the week, as retaliation from Iran and Russia to the US-led air strikes has not materialized and the possibility of broader tensions has dissipated for now.
The fear of supply concerns due to Syrian air strikes was mainly due to possible broader geopolitical tensions if Russia and Iran responded to the US missiles, as Syria has not been an exporter of crude oil since the start of its civil war in 2011. Although the Syrian air-strike impact on crude supplies has dissipated for now, sentiment in the market remains bullish, with successful OPEC-led supply cuts, continuously declining Venezuelan production, sanctions imposed on Russia, and possible sanctions on Iran if President Trump decides to withdraw from the Iranian nuclear deal. OPEC-led supply cuts, which are being supported by declining Venezuelan production, are the main catalyst supporting the bullish sentiment, and they will continue to support prices. Sanctions on Russia will also support prices to some extent. Although sanctions are not affecting crude exports or production from Russia for now, they could have some impact on supply if they were to target Russian oil companies. Another strong catalyst supporting bullish sentiment is the Iranian nuclear deal. President Trump has to make a decision by May 12 to either extend the waiver on sanctions by sticking to the nuclear deal or reintroduce the sanction by withdrawing from the deal, which could have a significant impact on Iranian crude exports. The joint OPEC and non-OPEC ministerial monitoring meeting is set to take place later this week, and any bullish news from that meeting would also support prices.
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. EIA’s latest report stating US shale production could increase 125 MBbl/d in May over April increased the bearish sentiment, signaling 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.
The general bullish sentiment could shift to bearish quickly if geopolitical tensions dissipate further and President Trump decides to extend the Iranian nuclear deal, which would ease the fears of Iran losing a majority of their crude exports. A possible reawakening of a US-China trade war could also support the bearish sentiment moving forward.
The rising geopolitical tensions and the possibility of Iranian sanctions brought the speculators back in trade. The bullish news will continue to support prices in the near term and could test new highs near $70/Bbl, which would be a reasonable area for buying to cease, should additional events embolden the bulls. This type of speculative bubble could leave the market open for a major sell-off if sentiment shifts to more bearish and causes the speculatively induced trade to leave its place to fundamentals and make a correction. While additional news regarding OPEC quotas, inventory normalization, or temporary supply disruptions due to geopolitical issues will continue to cause short-term price gains, the promise of additional growth from US producers if prices remain at these levels 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 for high quota compliance to continue through 2018 and for demand growth projected by IEA to 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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