US crude oil stocks decreased by 0.9 MMBbl last week. Gasoline and distillate inventories increased by 2.1 MMBbl and 5.0 MMBbl respectively. Yesterday afternoon, API had reported a crude oil withdrawal of 0.72 MMBbl, whereas analysts had expected a small build of 0.58 MMBbl/d. The most important number to keep an eye on, total petroleum inventories, posted an increase of 0.5 MMBbl. For a summary of the crude oil and petroleum product stock movements, see table below.
US production was estimated to be up 9 MBbl/d from last week per EIA’s estimate. Imports were down 0.03 MMBbl/d last week to an average of 7.5 MMBbl/d. Refinery inputs averaged 16.3 MMBbl/d (114 MBbl/d less than last week), leading to a utilization rate of 89.8%. The petroleum stocks report has bullish and bearish elements this week. The crude oil withdrawal is bullish, as it runs contrary to the analyst expectations of a build. However, the large builds in gasoline and distillate inventories are bearish, especially given that refinery utilization remains below 90%. Prices are trading on the news that OPEC has agreed to a production cut and very little attention is being paid to the storage report. Prompt month WTI prices are up $3.25/Bbl today, trading at $48.48/Bbl at the time of writing.
See Drillinginfo’s EIA Charts.
Crude oil prices jumped this morning on news that OPEC has agreed to reduce output by 1.2 MMBbl/d. OPEC is expected to provide more details later today regarding the mechanics of the cut. If successfully implemented, the oversupply could be fixed as soon as 1Q2017. The market had largely expected an agreement to be announced, as without one the integrity of OPEC would have been compromised. Now the focus shifts to understanding the details of the deal and the likelihood of OPEC being able to enforce the production cut. The cartel has a bad reputation in terms of making good on production quotas, as “cheating” among members has been a marked problem in the past. The details of the deal will come under great scrutiny as the market will look for a set and feasible plan to achieve the 1.2 MMBbl/d cut. Prices in the short-term will depend on how believable the details of the production cut are. In the coming months, traders and analysts will keep a close eye on how well OPEC enforces the quotas. If the 1.2 MMBbl/d cut is successfully implemented, the effects would be quantifiable starting in February, as cargo schedules are usually set one to two months in advance. The market was already on track to fix the oversupply situation by 2H2017, so the OPEC cut would speed that process up and fix the inventory overhang quickly. However, the duration of the OPEC production quotas becomes uncertain when considering the supply deficit would start to become significant in the latter part of next year. If the 1.2 MMBbl/d cut can be implemented successfully, prices could average in the $60/Bbl range next year. Drillinginfo expects that enforcing the 1.2 MMBbl/d cut will be tough and the amount taken off the market is likely to be less than that. The details of the deal will prove crucial in determining whether the quoted production cuts are believable, so expect prices to remain volatile until the market can digest the mechanics of how the cuts will be implemented.