Huge Crude Build Leads to Oil Price Plunge

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Oil prices plunged Wednesday morning when the Energy Information Agency (EIA) showed similarly bearish data to what had been provided by the American Petroleum Institute (API) Tuesday evening. The API estimated that U.S. crude inventories increased by 11.6 million barrels during the week ending March 3.

In the EIA’s Weekly Petroleum Status Report, it was reported that U.S. crude stocks rose by 8.2 million barrels to 528.4 million barrels, marking a fresh record high for oil held in storage. Analysts were estimating a build of between 1 million and 2 million barrels. A weekly increase in average crude imports accounted for almost half the build in inventories. Weekly U.S. crude production rose by 56,000 barrels per day to 9.088 million barrels per day – representing a 13-month high.

Oil prices plunged to 3-month lows Wednesday, with the front-month WTI contract settling down 5.4 percent on the NYMEX at $50.28 per barrel; the Brent front-month contract fell 5 percent on the ICE to $53.11 per barrel.

The EIA report was not all doom and gloom, however, and showed some definitively positive data points. For the week ending March 3, it was reported that gasoline inventories decreased by a large amount – 6.6 million barrels. Distillate stocks (including diesel and heating oil) fell by 2.7 million barrels, with average demand during the last 4-week period 12.6 percent higher than during the same time last year, according to the EIA.

A significant part of the draw in gasoline stocks was due to an uptick in implied demand, which accounted for about 4.1 million barrels. Refinery utilization was down slightly week over week, from 86 percent to 85.9 percent, as refiners continue seasonal maintenance activity. Imports of total motor gasoline were down approximately 1.5 million barrels versus the previous week.

While concerns around waning U.S. gasoline demand may have been assuaged by this week’s EIA report, it is important to note that storage levels for crude, gasoline, and distillate are all near or above the upper limits of their respective seasonal historical averages.

The significant fall in oil prices Wednesday is reflective of growing sentiment that the OPEC/non-OPEC coordinated cut of 1.8 million barrels per day will have little long-term impact on balancing markets. While a second OPEC cut at the end of the initial 6-month period would be welcomed by the market, it is apparent that OPEC, led by Saudi Arabia, is less inclined to carry-out another output reduction.

In comments at a major oil and gas industry conference held in Houston this week, Saudi Energy Minister Khalid Al-Falih emphasized that his country was largely responsible for the success of the coordinated cuts that commenced in January of this year, and that there would be “no free rides” for non-OPEC producers.

At the same time, U.S. shale oil production is expected to rise in the coming years. The EIA issued its Short-Term Energy Outlook Tuesday, which estimates U.S. production to grow from an estimated 8.9 million barrels per day in 2016 to 9.7 million barrels per day by 2018. Moreover, U.S. majors Chevron Corp. and Exxon Mobil Corp., both having financial heft and large acreage portfolios, are upping their bets on U.S. shale production and short-cycle projects that are cash-generative in less than two years, in some cases.

During the 2-plus year price downturn that was precipitated by the decision by OPEC, namely Saudi Arabia, to “let markets decide price,” the majors and independents alike, have been able to drive operational efficiencies to lower breakeven prices to between $35 per barrel to $50 per barrel. Against this backdrop and keeping in mind that Saudi Arabia is marketing an expected IPO of Saudi Aramco, it makes sense that the Kingdom proclaims control over the price stabilization we’ve seen over the past few months. But, with U.S. producers expanding supply and exporting at a record pace, OPEC’s sway over markets should continue to diminish.

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 delia.morris@stratfor.com

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