Source: Anthony Starkey | S&P Global Platts Analytics | Manager, Energy Analysis
Increase in Imports and Production Expected to Grow
Crude inventories built by nearly 6.5 million barrels in the week ending January 27th, according to the EIA. This was spurred by both a jump in imports as well as a decline in refinery runs. Imports from Canada were the highest reported ever, and contributed to the large week on week increase of imports into PADD 2. Production was also reported to be lower week on week, though the general trend and expectations of that number moving higher in the months ahead is firmly ingrained into the minds of market participants.
Offshore and Alaska Contribute to US Production Jump
It should be noted that the EIA’s most recent monthly figures, often seen as a more accurate indicator of supply and demand than the weekly figures, though obviously on a lagged basis, were published yesterday. It showed US production at 8.9 million b/d for the month of November, or roughly in line with where the current weekly estimates are being reported. It is also worth noting that the jump in US production since September has largely been on the back of recovering offshore output and seasonal increases in Alaskan output. We have yet to really see the improvement in shale output that the recent rise in rigs has been portending should occur sometime in the first half of this year.
Gasoline inventories built by approximately 3.8 million barrels despite lower imports and lower production of the fuel, as the implied demand number for gasoline continues to show weakness. If last year’s surge in gasoline inventories to start the year was a worrying sign for the market, then this year should be no different, with gasoline inventories growing at a similar pace but from a higher starting point.
US Distillate Inventories and OPEC Supply Cut Compliance
Distillate inventories grew by 1.5 million barrels, and coupled with draws in other hydrocarbon categories, the US net built 5.2 million barrels of oils last week. While the initial reaction to the numbers was bearish, much like last week, the market is ignoring current fundamentals in favor of expectations of improving future fundamentals, and has pushed prices back up to the highs of the day. In their defense, we have seen early reports of high OPEC compliance with their proposed supply cuts, and current US inventories are still reflecting OPEC output levels that were much higher than where they are currently. For example, on a four week moving average basis, imports of Saudi Arabian crude into the US is at one of its highest levels in the past two years. This is likely to wane in the weeks ahead.
Seasonal Factors and Crude Inventories
That said, at current net crude import levels, the US is building crude inventories, as it nearly always does this time of year due to seasonal factors. With refinery runs expected to stay at lower levels for the next month or two, all else being equal, the US could cut net imports by half a million barrels per day and we would not see any real draw down of crude inventories. This pushes us into March with, presumably, US production continuing to rebound thanks to sustained $50+ oil prices, and a market that will theoretically start discounting the return of over 1 million b/d of self-imposed supply cuts from select OPEC/non-OPEC countries come July.
The Speculator Perspective
The speculators are certainly in control, with any attempt to try and short the market short lived. However, their ammunition is running a bit thin, if historical positioning is any indication. The market needs drawdowns in inventory to force physical players to remove their storage hedges. Even then, the appetite of independent US E&Ps to hedge future output as prices rise remains in play, capping some of the upside the removal of storage hedges would provide. While this may have more impact on curve structure than outright pricing, it is selling of derivatives nonetheless. In sum, with each passing day, the market nears a precipice. With each passing day we move further away from discounting OPEC cuts, and closer towards discounting the return of OPEC supply. The window of opportunity for a significant move higher in oil prices in the near term continues to narrow, but is not completely closed as of yet.