US crude oil stocks increased by 0.9 MMBbl last week. Gasoline and distillate stocks posted sizeable withdrawals of 5.5 MMBbl and 5.2 MMBbl respectively. Yesterday afternoon, API had reported a crude oil withdrawal of 0.5 MMBbl, while reporting gasoline and distillate withdrawals of 5.8 MMBbl and 5.0 MMBbl respectively. Analysts were expecting a crude withdrawal of 0.4 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted a significantly large withdrawal of 12.2 MMBbl. For a summary of the crude oil and petroleum product stock movements, see table below.
US production was estimated to be up 1,101 MBbl/d from last week per EIA’s estimate. Lower 48 production increased 1,109 MBbl/d (due to Gulf of Mexico recovering from Hurricane Nate). Alaska production decreased 8 MBbl/d. Imports were up by 640 MBbl/d last week to an average of 8.1 MMBbl/d. Refinery inputs averaged 16.0 MMBbl/d (586 MBbl/d more than last week), leading to a utilization rate of 87.8%. The large withdrawals in gasoline and distillate were expected as refinery maintenance season begins. The report is bearish due to the unexpected increase in crude oil stocks. Prices are down, with prompt month WTI trading down $0.30/Bbl at $52.17/Bbl.
Prices continued their upward trend and traded in the $55-$57/Bbl range last week. Prices rose to near their two-year highs as geopolitical tensions in Middle East rose further over the weekend.
Geopolitical tensions and conflicts in Middle East rose after Iran-backed Houthis fired a missile from Yemen to Riyadh airport on Saturday. The missile was intercepted, however the situation raised tensions between Saudi Arabi and Iran, two major OPEC members and producers. Prices increased even further before the market could fully digest the impact of the attempted attack on Saudi Arabia, as Saudi’s Crown Prince Mohammad bin Salman launched an anti-corruption purge. Several princes and ministers were arrested over the weekend on corruption allegations. The surprise purge in Saudi Arabia will help Salman to consolidate power, in order to bring his ambitious Vision 2030 economic program to life.
As the OPEC meeting edges closer, the market remains bullish. In addition to news from Saudi Arabia, there were other factors that played a role in oil’s recent upward move. Concerns over the Iraqi government ending all crude exports from Kirkuk to Turkish port of Ceyhan as well as increased attacks on oil infrastructure in the Niger delta have increased the bullish sentiment.
The possibility of an extension to production cuts seems more likely as we get closer to the November OPEC meeting. OPEC has been favoring an extension of the production cuts. The meeting between Saudi Arabia, Russia, Kazakhstan and Uzbekistan over the weekend consolidated the production cut extension expectation, as they stated they are willing to maintain the restriction on production to balance the market and increase prices.
The possibility of US producers increasing activity and taking advantage of a higher price environment and Libya willing to increase production to 1.25 MMBbl/d remain as the only elements driving bearish sentiment, and they are slowly fading away as geopolitical tensions are grasping control over the markets.
The market has now held over $49.00/Bbl for over a month, establishing that as the low end of the new range. It is still critical that high compliance with production quotas and realization of the demand growth projected by IEA will need to occur in order to reach the five-year average inventory levels. Without inventory normalization, the price recovery will not be sustained. Drillinginfo expects the trade to return to the previous range $50-$54/Bbl in the coming weeks as fundamentals start to settle back in.
Please find the updated Drillinginfo charts on the link below:
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