US crude oil stocks decreased by 2.6 MMBbl last week. Gasoline and distillate inventories decreased by 1.7 MMBbl and 2.0 MMBbl, respectively. Yesterday afternoon, API reported a crude oil draw of 2.7 MMBbl alongside gasoline and distillate draws of 1.1 MMBbl and 1.9 MMBbl, respectively. Analysts, on the contrary, were expecting a crude oil build of 2.6 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted a large decrease of 6.9 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 26 MBbl/d from last week, per EIA. Crude oil imports decreased by 508 MBbl/d last week, to an average of 7.1 MMBbl/d. Refinery inputs averaged 16.8 MMBbl/d (410 MBbl/d more than last week), leading to a utilization rate of 91.7%. The report is bullish, as crude oil inventories declined, contradicting analyst expectations, and total petroleum stocks posted a large withdrawal. Prompt-month WTI was trading up $1.54/Bbl to $65.08/Bbl at the time of writing.
WTI prices traded in the $62/Bbl-$64/Bbl range last week. Prices have been on a sharp rise since the beginning of the week, settling at their highest level of the month on Tuesday and nearing the highest levels in six weeks today. Prices found support and rose due to significantly declining Venezuelan production, increasing tensions in Middle East, and API reporting a draw in crude oil inventories.
The bullish sentiment in the market began increasing with the dismissal of Rex Tillerson and his position on the Iran nuclear deal. Tillerson’s departure signaled that President Trump could possibly pull out of the Iran nuclear deal, which could lead to re-imposition of sanctions against Iran. Reimposing sanctions on Iran could significantly decrease the crude exports by that country, which would support the prices moving forward and help Saudi Arabia in its quest to raise prices ahead of the Saudi Aramco IPO. Prices also got support from rising tensions between Saudi Arabia and Iran. Saudi crown prince Mohammed bin Salman, ahead of his visit to the US, accused Iran of waging proxy wars across the Arab world, and stated that if more isn’t done to prevent Iran from acquiring a nuclear weapon, his country will pursue its own, as soon as possible. Additionally, sharply declining Venezuelan production is supporting prices. Venezuela’s February output was down more than 0.5 MMBbl/d compared with a year ago, according to IEA.
Although the bullish sentiment from geopolitical tensions is creating short-term price gains, continuously increasing US production and the future supply/demand imbalance potential will continue pressuring prices. EIA still projects US production to surpass 11 MMBbl/d in 2018, which will get the US very close to passing Russia and becoming the largest crude producer in the world. Although this fact was masked due to rising tensions in Middle East, prices also got some support from Zawiya port in Libya reopening and restoring production.
The market internals continue to lack directional bias. Speculative length has been selling the rallies rather than adding to positions as it did earlier in the year. The price rally of the past two days may not be sustainable, as it may be met with selling (hedging) by US producers. While additional news regarding OPEC quotas, inventory normalization or temporary supply disruptions due to geopolitical issues could cause short-term price gains and volatility to continue, the promise of additional growth from US producers is likely to limit longer-term extensions. For the market to have any chance of normalizing inventories to levels seen prior to the price crash, it is critical that high quota compliance continues through 2018 and that the demand growth projected by IEA occurs concurrently. Without inventory normalization, the price recovery cannot be sustained. Drillinginfo believes that the fundamentals mean prices will settle in a range around $55/Bbl in the longer term, when supply and demand become the focus of the market once again.
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