This opinion piece presents the opinions of the author.
Wednesday morning both the U.S. and global benchmarks slipped over 80 cents off newsflow that U.S. crude inventories had risen by 5 million barrels for the week ending March 17. The Energy Information Agency (EIA) confirmed numbers provided by the American Petroleum Institute (API) on Tuesday night that estimated crude stocks had risen by 4.53 million barrels. Analysts had been expecting an increase in crude inventories of about 2.8 million barrels.
The front-month WTI contract settled down .4 percent Wednesday on the NYMEX at $48.04 per barrel; meanwhile, Brent front-month contract fell .6 percent on the ICE to $50.64 per barrel.
Markets have been especially sensitive to the interplay of rising crude inventories in the U.S. and in OECD countries with the relative benefit of the 1.8 million barrel per day output cut agreed in Nov. 2016 among countries from the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC.
Crude inventories generally do rise during refinery maintenance season, which runs through the end of April, and should not be the primary indicator of demand health. Despite this, traders have focused on U.S. crude inventory levels – seemingly as a proxy for demand – to gauge whether the cuts will drive balance back to global oil markets by the end of the agreed production cut period, which ends in June.
With oil prices stabilizing around $50 per barrel since the announced cuts, global oil markets are also concerned with the resurgence and the potential magnitude of U.S. oil production derived from short-cycle shale developments.
For the week ending March 17, the EIA reported that U.S. oil production rose by 20,000 barrels per day to 9.129 million barrels per day. The EIA has forecasted that U.S. oil production should rise from an estimated 8.9 million barrels per day in 2016 to 9.2 million barrels per day in 2017, and 9.7 million barrels per day in 2018.
Crude inventories rose largely as a result of a significant increase to imports. According to the EIA, the U.S. imported 8.3 million barrels per day for the week ending March 17, an increase of 902,000 barrels per day versus the previous week, but in-line with levels during the same period last year.
Inventories at Cushing, OK – the delivery point for the WTI contract – rose by 1.5 million barrels week-over-week to 68 million barrels. U.S. exports of crude, which had been at a record pace during most of 2017, fell 167,000 barrels per day for the week ending March 17, to 550,000 barrels per day.
In its Weekly Petroleum Status Report, the EIA reported that gasoline inventories fell by 2.8 million barrels, versus expectations for a drop of 2.0 million barrels. Distillate stocks (including diesel and heating oil) fell 1.9 million barrels, versus analyst estimates for a decrease of 1.4 million barrels. The weekly U.S. refinery rate rose by 2.3 percent to 87.4 percent. Total gasoline imports fell week over week, while exports rose. Over the last four-week period, total motor gasoline demand was down 2.9 percent versus the same period last year.
Overall, data from Wednesday’s EIA report was not compelling enough to move prices strongly downward. Undoubtedly, markets are watching closely the weekly data, but of more import is whether or not OPEC – led by Saudi Arabia (by dint of having the most spare capacity – will be willing to extend a production cut beyond the January to June timeframe.
Recent rhetoric from OPEC countries points to some willingness to continue with production pullbacks, but with the proviso that non-OPEC participation is part and parcel of any future deal. OPEC’s adherence to the cuts has been historically high – at around 90 percent – while non-OPEC, led by Russia, has been underwhelming. It was reported earlier this week that Russia had cut 161,000 barrels per day, versus a commitment to cut 300,000 by the end of the deal.
Many OPEC countries plus Russia are currently faced with rising social unrest and fiscal pressure that can only feasibly be offset by a stable oil price. Given the effectiveness of the first coordinated production cut to prop up prices, it would seem the only option is to extend them beyond the initial period.
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 firstname.lastname@example.org
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