US crude oil stocks decreased by 1.8 MMBbl last week. Gasoline stocks posted an increase 1.1 MMBbl while distillate stocks decreased by 0.8 MMBbl. Yesterday afternoon, API had reported a crude oil withdrawal of 0.76 MMBbl, while reporting a gasoline build of 1.5 MMBbl and distillate withdrawal of 4.5 MMBbl. Analysts on the contrary were expecting a crude build of 1.3 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted a sizeable withdrawal of 5.1 MMBbl. For a summary of the crude oil and petroleum product stock movements, see table below.
US production was estimated to be up 37 MBbl/d from last week per EIA’s estimate. Lower 48 production was reported to be up 16 MBbl/d (numbers indicate production back to normal levels, and recovered from Hurricane Harvey), Alaska production increased 22 MBbl/d. Imports were up by 59 MBbl/d last week to an average of 7.4 MMBbl/d. Refinery inputs averaged 16.2 MMBbl/d (1.0 MMBbl/d more than last week), leading to a utilization rate of 88.6%. The report was bullish given the higher than expected withdrawal in crude oil stocks along with the sizeable decline in total petroleum inventories. Additionally, the report showed that refining capacity utilization was picking up following the outages associated with Hurricane Harvey. Prices are up on the bullish release, with prompt month WTI trading up $0.25/Bbl at $52.13/Bbl.
Prices have been trading in the $50-$52/Bbl range, and hit a seven-month high ($52.22) yesterday at the close of trade. The price rally seen over last week was initiated with the bullish IEA report that showed declining OPEC production as well as increasing demand outlook and continued due to optimism surrounding the OPEC meeting.
Although OPEC did not make any decisions whether to extend the cuts beyond the current March 2018 expiration date, the market remained bullish as Saudi Arabia, Venezuela and Iraq have remained keen to the extension. Prices also got support from news that arose out of Turkey, where Turkish President Recep Tayyip Erdogan threatened to cut off the pipeline that flows nearly 0.6 MMBbl/d of crude from Northern Iraq to the Turkish port of Ceyhan. The Turkish President, who has close ties to Saudi Arabia, threatened to shut down the pipeline if Kurdish independence referendum is successful. This would help OPEC and Saudi Arabia significantly in cutting supply from the market in an effort to increase prices.
The market will be closely watching OPEC compliance levels, as well as the situation in Turkey. A possible pipeline shutdown to Northern Iraq (could be the new Kurdistan) crude by the Turkish President could increase prices in the short term, however the possibility of Libya and Nigeria adding more production will offset OPEC’s attempt to reduce their production and work against the supply cuts.
The economics of US production promise higher supply, even in a slightly higher price environment ($5-$10/Bbl). Even if the OPEC quotas are extended, US production potential will serve as a cap on how high prices can go. As previously stated here, continued high compliance with production quotas and realization of the demand growth projected by IEA will need to occur simultaneously for any chance of near-term inventory normalization. Without inventory normalization, there can be no sustained price recovery.Drillinginfo expects volatile trade to continue within the recent range between $45-$53/Bbl in the coming weeks, as the market looks for long-term signs of inventory normalization.
Please find the updated Drillinginfo charts on the link below:
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