A combination of fewer imports and more exports has pushed more supply away from the U.S. crude oil market, a development that could weigh on prices unless global demand can absorb the additional barrels, according to an S&P Global Platts preview of this week’s pending U.S. Energy Information Administration (EIA) oil stocks data.
Survey of Analysts Results:
(The below may be attributed to the S&P Global Platts survey of analysts)
* Crude oil inventories expected to rise 2.1 million barrels
* Refinery utilization expected to decline 0.2 percentage points
* Gasoline stocks expected to fall 200,000 barrels
* Distillate stocks expected to draw 200,000 barrels
S&P Global Platts Analysis:
(The below may be quoted in part or full, with attribution to S&P Global Platts Oil Futures Editor Geoffrey Craig)
U.S. crude oil production has reached 10.27 million b/d, a year-on-year gain of 1.269 million b/d, but trade flows have adjusted to avoid massive builds in stocks.
On the contrary, U.S. crude oil inventories at 420.48 million barrels sit 98.2 million barrels below the year ago level, according to data from the U.S. Energy Information Administration.
Analysts surveyed Monday by S&P Global Platts expect stocks rose by 2.1 million barrels last week, which if confirmed, would mark the fourth build over the last five weeks.
Stocks typically build at this time of year, but the size of increases has been smaller than normal. As a result, stocks now exceed the five-year average by 1.3%, down from 9.3% at the end of 2017.
Tightening U.S. inventories sparked a rally that lifted crude futures to three-year highs in late January, and have helped prices pare declines following a pullback in the first half of February.
Front-month NYMEX crude was around $64/b Monday afternoon, down from more than $66/b January 26, but off a low of roughly $58/b less than two weeks ago.
A major factor putting downward pressure on U.S. crude inventories has been the combination of fewer imports and more exports.
U.S. crude imports minus exports — or “net imports” — dropped sharply in September and has stayed lower since then.
Net imports averaged 7.18 million b/d from January through August 2017, but then dropped to 5.803 million b/d in September, according to monthly EIA statistics.
This change coincided with the ICE Brent/WTI spread widening in August beyond $3/b, which had marked the upper end of its range since late 2015 when legal restrictions on U.S. exports were lifted. That spread fluctuated from $5-$7/b from September until late January, keeping a lid on net imports.
Even though the Brent/WTI spread has narrowed to under $4/b this month, weekly net imports plunged by 1.589 million b/d the week ending February 16 to 4.977 million b/d, according to EIA data.
U.S. crude exports jumped 722,000 b/d to 2.044 million b/d, the second-highest number on record behind the 2.133 million b/d seen the week ending October 27.
In addition, imports plunged 867,000 b/d to 7.021 million b/d, the fewest since early September, when arrivals on the Gulf Coast were disrupted in the aftermath of Hurricane Harvey.
Last week likely saw flows partly reverse. According to estimates by S&P Global Platts Analytics, crude imports averaged 7.85 million b/d last week and exports averaged 1.022 million b/d. Another estimate, using S&P Global Platts Analytics’ regression model based on one-day lagged U.S. Customs data, put crude imports at 7.451 million b/d.
TERM STRUCTURES CONVERGE
Nonetheless, the broader question remains: Can global oil demand prove sufficient to offset the additional barrels hitting the market as a result of fewer U.S. imports and more U.S. exports?
One sign that U.S. supply has already started to weigh on the global oil market can now be seen in ICE Brent’s term structure.
ICE Brent’s term structure began to strengthen in summer 2017, flipping into backwardation, but since January it has softened slightly.
The one month to two months (M1/M2) spread has averaged 30 cents/b this month, down from 43 cents/b in January and 45 cents/b in December.
Moreover, NYMEX crude’s nearby term structure — which had remained in contango — moved into backwardation in January for the first time since late 2014, and has been closing the gap relative to ICE Brent.
As of Monday afternoon, the April/May spreads for ICE Brent and NYMEX crude were backwardated around 20 cents/b and 15 cents/b, respectively.
Crude inventories at the NYMEX crude delivery point in Cushing, Oklahoma, have more than halved since early November to 30 million barrels, helping to strengthen the contract’s term structure.
PLANNED WINTER MAINTENANCE
One reason why tanks at Cushing have drained has been the new pipeline capacity available for crude to flow from the booming Permian Basin to Gulf Coast export terminals.
Crude output in the Permian Basin is projected to reach 4.5 million b/d in 2019, up from 3.6 million b/d in 2018 and 2.5 million b/d in 2017, according to S&P Global Platts Analytics.
All of this supply means global demand in 2018 must grow sufficiently or the additional barrels will eventually drag prices lower.
Seasonal refinery demand should eventually rise, but for now winter maintenance is limiting crude runs. Analysts are expecting refinery utilization fell 0.2 percentage point last week to 87.9% of capacity. A year ago the utilization rate equaled 86% and bottomed at 85.1% two weeks later.
Gasoline and distillate stocks were both expected to have drawn last week by 200,000 barrels. The five-year average for the same reporting period shows gasoline stocks declining by 1.3 million barrels and distillate stocks rising by 220,000 barrels.