US crude oil stocks increased by 1.9 MMBbl last week. Gasoline and distillate inventories increased by 3.4 MMBbl and 3.9 MMBbl, respectively. Yesterday afternoon, API reported a surprise crude oil draw of 1.1 MMBbl along with a gasoline draw of 0.2 MMBbl and a distillate build of 4.6 MMBbl; analysts were expecting a crude oil build of 3.2 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted an increase of 4.4 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 332 MBbl/d from last week, per EIA. Crude oil imports decreased by 538 MBbl/d last week to an average of 7.9 MMBbl/d. Refinery inputs averaged 16.8 MMBbl/d (784 MBbl/d more than last week), leading to a utilization rate of 92.5%. The report is extremely bearish, as EIA reported US production surpassing 10 MMBbl/d along with builds in crude oil and total petroleum stocks. Prompt-month WTI was trading down $1.56/Bbl to $61.83/Bbl at the time of writing.
WTI prices traded in the $63-$65/Bbl range last week. Prices pared some losses on Tuesday following the crude withdrawal reported by API; however, they have been on a downward spiral since late last week. Both benchmarks have fallen about 4% from the highs seen in late January.
Prices started falling following the financial turmoil and the stock market rout that began on Friday. The price rally that was fueled by extensions of the OPEC supply cuts, geopolitical unrest in the Middle East, temporary supply disruptions, and weakening strength of the dollar ran out of steam. Prices will be under further pressure with a stronger dollar, increasing US production, the refinery maintenance season, and the market’s rediscovery of the fundamentals. The last couple of months’ price rally and higher price environment helped US producers increase production domestically as well as increase exports, taking advantage of a widening spread between WTI and Brent, which helped the rapid decline in crude inventory levels.
The market has slowed down its speculative long bets; however, the market is still open and vulnerable to a large profit-taking rally. Bullish sentiment that was built on OPEC cuts and geopolitical unrest is slowly fading away as recognition of US production surpassing 10 MMBbl/d sinks in, which also puts Saudi Arabia and Russia at risk of losing further market share. In its latest report, EIA increased its US production expectation, stating it would reach 11 MMBbl/d by the end of 2018. Increasing US production and the refinery maintenance season will put further pressure on prices in the near term.
The market has now held at over $60/Bbl for almost a month, establishing $60/Bbl as a resistance level. Drillinginfo expects a more consolidative trading pattern in the coming weeks as speculative traders start to re-evaluate the fundamental supply-and-demand balance. While additional news regarding OPEC quotas, inventory normalization, or temporary supply disruptions due to geopolitical issues may create short-term price gains and volatility, the promise of additional growth from US producers is likely to limit longer-term extensions. It is critical that high quota compliance continue through 2018 and that the demand growth projected by the IEA occur concurrently in order for the market to have any chance of normalizing inventories back to what levels were prior to the price crash. Without inventory normalization, the price recovery cannot be sustained. Drillinginfo believes the supply-and-demand fundamentals suggest a lower equilibrium and expects prices to return to a less speculatively induced price level, settling in a range around $55/Bbl for an extended period.
Please find the updated Drillinginfo charts on the link below:
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