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Before the Energy Information Agency’s (EIA) Wednesday morning release of its Weekly Petroleum Status Report, oil prices had been drifting higher off comments from Iraq’s Prime Minister Haider al-Abadi that the country would be willing to participate in a coordinated output cut among the Organization of the Petroleum Exporting Countries (OPEC). Iraq had previously articulated its resistance to joining any deal because of the country’s imperative to grow crude production in order to bring in revenue to continue the fight against Islamic State.
Oil markets are largely concerned with whether or not OPEC will be able to arrive at a deal in Vienna Nov. 30, and if that is somehow managed, if the cuts will go far enough to cut into a global oil supply overhang estimated to be as much as one million barrels per day. There is also the perennial fear that even if an agreement is reached, that individual cartel members will not adhere to production quotas. Compounding these concerns is the fact that OPEC, as well as Russia (the world’s largest crude producer), are currently operating at record output levels, at 33.83 million barrels per day and 11.2 million barrels per day, respectively.
The front-month U.S. West Texas Intermediate (WTI) contract settled down 7 cents Wednesday on the NYMEX at $47.96 per barrel, while the Brent front-month contract fell .3 percent on the ICE to $48.95 per barrel. An increase in the value of the U.S. dollar also capped any gains on oil after Federal Reserve officials released a statement Wednesday that indicated that a December interest rate hike was highly likely.
For the week ending Nov. 18, the EIA reported a surprise decrease to U.S. crude inventories of 1.3 million barrels, versus expectations for a build of between around 670,000 to 800,000 barrels. On Tuesday evening after the market close, the American Petroleum Institute (API) estimated that oil stocks fell by the same figure of 1.3 million barrels.
Gasoline inventories showed a larger than expected increase of 2.3 million barrels, versus analyst estimates of a build of 640,000 barrels. Distillate stocks (including diesel and heating oil) were mostly in line with expectations, and increased by 327,000 barrels, according to the EIA. Inventories for crude, gasoline and distillates remain at or above the high-end of the average range for this time of year.
The unexpected decrease to crude stocks was a function of refiners continuing to emerge out of the seasonal refinery maintaince season and the commensurate increase in the refinery utilization rate, which rose from 89.2 percent to 90.8 percent, week over week. Weekly U.S. imports also fell considerably, from 8.42 million barrels per day during the previous week to 7.58 million barrels per day.
The greater than expected build to gasoline inventories reflected refiners looking to expand operating margins. With gasoline demand in the United States still relatively robust for this time of year and expected to continue to grow, refiners are now locking in lower input prices given the oil market contango, which is when longer-dated futures are more expensive than near-term contracts.
At the end of the day, all eyes (and ears) are on OPEC and what will come out of the Vienna meeting. Even if there has been some positive newsflow from Iraq and Russia around their willingness to participate in a coordinated cut, the credibility of OPEC to take action (after two years of “letting the markets decide”) will fall on Saudi Arabia, the de facto leader of the cartel. With its recent debt issuance of $17.5 billion, and a much-anticipated Aramco partial IPO on the horizon, markets are looking for the Kingdom to take charge and show that it still holds sway in world oil markets to move the price.
There are many reasons to bet against its ability to do so. Iran’s willingness to participate in an output cut looks more dubious following the election of Donald Trump, who has vowed to dismantle the nuclear arms deal that led to the lifting of sanctions on the country. Iran has been aiming to bring back its production to post-sanction levels of at least 4 million barrels per day – and has every reason to continue pushing its agenda to grow output and expand its customer base, especially if its competitors within OPEC decide to take supply off the market.
Delia Morris has worked in the international upstream oil & gas industry for over 13 years, and is currently Director, Global Energy Sector at Stratfor, a geopolitical intelligence firm that provides strategic analysis and forecasting services. Please contact Delia at email@example.com
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