US crude oil stocks posted an increase of 5.5 MMBbl from last week. Gasoline and distillate inventories decreased 2.1 MMBbl and 0.7 MMBbl, respectively. Yesterday afternoon, API reported a crude oil build of 6.9 MMBbl while reporting a gasoline build of 2.2 MMBbl and a distillate draw of 0.87 MMBbl. Analysts, to the contrary, were expecting a crude oil draw of 0.5 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted a large increase of 8.8 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.
US crude oil production increased 100 MBbl/d last week, per the EIA. Crude oil imports were up 1.16 MMBbl/d last week, to an average of 7.1 MMBbl/d. Refinery inputs averaged 16.6 MMBbl/d (505 MBbl/d more than last week), leading to a utilization rate of 90.1%. The crude oil and total petroleum stocks build stopped the price rally and pushed prices down below $66/Bbl. Prices are still getting support from the US government’s decision to cancel Iranian sanction waivers and the unrest in Libya potentially threatening the country’s supply levels. Prompt-month WTI was trading down $0.38/Bbl, at $65.92/Bbl, at the time of writing.
Prices have been rising and rallied to their six-month highs at the beginning of the week, breaking through the $66/Bbl mark on Tuesday. The sharp increase in prices was due to the US government’s decision to drive Iran’s crude exports to zero. The tightening global supply levels and situation in Libya also supported prices.
Prices pierced $66/Bbl after the Trump administration announced that it will not extend sanction waivers to certain countries that import Iranian oil, as well as announcing that all Iranian oil buyers will have to end imports from Iran in about a week or be subject to US sanctions. The Trump administration’s announcement certainly increased the bullish sentiment, as cancellation of waivers can erase as much as 1 MMBbl/d of additional supply in a market that has already been tightening due to OPEC-led supply cuts and declining production in Venezuela. Escalating tensions in Libya continue to threaten supply levels in the near term.
The US government’s goal of reducing Iran’s exports to zero and its latest announcements certainly have increased the possibility of a supply deficit and triggered the price rally. However, this rally may be temporary, as there were already discussions between OPEC and Russia about possibly not extending the supply cuts into the second half of the year, with a potential scenario of increasing the supply levels. After the Iranian sanctions announcement, the OPEC meeting in June becomes even more important, as OPEC (led by Saudi Arabia) and Russia may decide to fill the gap created by the reduction in Iranian and Venezuelan supply levels and try to grab market share from the United States, as the US is showing no signs of slowing down, instead continuously ramping up production. Another risk to prices will be the execution of Iranian sanctions, as Iran already retaliated by threatening to close the Strait of Hormuz, a crucial shipping lane in the global oil trade, which could cause disruptions and be detrimental to global supply levels.
The US government’s announcement on canceling waivers and bringing Iranian exports to zero took prices between $65/Bbl and $68/Bbl range (an area of consolidation from last fall during the price collapse) as previously mentioned here. The market will need further bullish headlines to break through this range whether from further news on sanctions or any supply disruptions from Libya. In the meantime, the possibility of OPEC and Russia ending the supply cuts and potentially increasing supply levels to replace the Iranian and Venezuelan crude, increasing US production and a gloomy global economic and demand growth outlook will keep the pressure on prices. If Iranian sanctions are not fully executed, get lash back or are denounced by countries with waivers at the same time if OPEC decides to end the supply cuts and increase output, prices could trace back to the $60/Bbl range, especially given the weak demand growth projections.