This opinion piece presents the opinions of the author.
Wednesday morning, the Energy Information Agency (EIA) reported a surprise increase to U.S. crude inventories for the week ending Dec. 16. The EIA’s Weekly Petroleum Status Report showed that U.S. crude inventories rose by 2.3 million barrels, versus expectations for a decrease of about 2.3 million barrels.
After market close Tuesday, the American Petroleum Institute (API) estimated that oil stocks had fallen by 4.1 million barrels. Although the market is showing bullish signs and is actually net long, oil likely fell off the newsflow, which was amplified due to thin trading during the pre-holiday week. The unexpected rise in crude inventories could be attributed to a large increase to imports, of 1.1 million barrels per day.
The front-month U.S. West Texas Intermediate (WTI) contract settled down 1.5 percent Wednesday on the NYMEX at $52.49 per barrel, while the Brent front-month contract fell 1.6 percent on the ICE to $54.46 per barrel.
Traders have shown optimism around the implementation of an agreement among the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC producers for a coordinated cut of 1.8 million barrels per day, which will commence in January 2017.
Since the Nov. 30 agreement, the front-month contract for the U.S. benchmark has averaged about $52 per barrel, versus about $43 per barrel in the preceding days of 2016. The front-month contract for the global benchmark has traded at about $55 per barrel in December, versus about an average daily price of $44 per barrel during the rest of the year.
It is typical to see a drop in crude inventories in the month of December due to refiners using the “last-in first-out” (LIFO) accounting method, which values inventories at the end of the year. With the rise in oil prices since January 2016 – a difference of about 20 dollars per barrel – comparing the average monthly price to December’s, it behooves refiners to destock to reduce its tax basis.
Moreover in the Gulf Coast (PADD 3) where most of the country’s refining capacity is located, companies are sometimes subject to ad-valorem taxes, which are assessed at the end of the year. In this week’s EIA report, PADD 3’s crude inventories fell by about 400,000 barrels week over week, but are almost 24 million barrels above the level seen during the same period last year. The U.S. refinery utilization rate rose 1 percent week over week to 91.5; with PADD 3 increasing by 1.2 percent to 94.2 percent.
Markets are anticipating positive news in January that both OPEC and non-OPEC hold up their ends of the bargain to cut production. However there are a couple of external factors to watch, which could possibly undermine high compliance in the coordinated cut.
One is the potential for Libyan crude to come back in a reliable and sustainable way to global markets. On Tuesday, the country’s National Oil Co. announced that two of its largest fields in western Libya, which had been offline due to the two-year blockade by Zintani militias of strategic pipelines, would soon be in production again. In a statement Tuesday, the National Oil Co. maintained that the two fields, Al-Sharara and Al-Feel, would be brought back online, at a production rate of 270,000 barrels per day, over the next three months.
According to certain sources in-country, the Zintani militias, which are aligned with Field Marshal Khalifa Haftar and the Libyan National Army (LNA), agreed to remove the blockade on the condition that they would not be prosecuted. With a complex and fluid political and security situation, Libya will continue to struggle to re-establish its upstream oil and gas sector and export capacity in order to prove itself as a reliable supplier of crude to global markets.
The resurgence of U.S. tight oil is the other main factor to watch. U.S. production has been stabilizing, and for the week ending Dec. 16, the EIA reported it to be at 8.8 million barrels per day. Along with the rig count, oil prices are likely to keep climbing in January. It will be interesting to see at which price point U.S. onshore producers will begin to ramp up operations, which would mean that OPEC and non-OPEC producers might be moved to not comply with the agreed cuts and instead secure market share.
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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