This opinion piece presents the opinions of the author.
Oil rose Wednesday morning after the U.S. Energy Information Agency (EIA) reported significant drawdowns in product inventories for the week ending March 24. Gasoline inventories fell by 3.7 million barrels, and distillate inventories (including diesel and heating oil) dropped by 2.5 million barrels.
Prices stayed robust throughout the day off newsflow around product inventory levels, and a lower than expected build in crude inventories of .9 million barrels. (Analyst estimates for oil stocks were for an increase of about 1.4 million barrels.) The U.S. also showed a significant boost in crude exports of a little over 1 million barrels per day, versus 550,000 barrels per day during the previous week.
The front-month WTI contract settled up 2.4 percent Wednesday on the NYMEX at $49.51 per barrel; the Brent front-month contract rose 2.1 percent on the ICE to $52.42 per barrel.
For the week ending March 24, gasoline stocks were expected to fall by about 1.9 million barrels. A considerable uptick in weekly refinery inputs to 16.2 barrels per day from 15.8 barrels per day contributed to the larger than anticipated draw of 3.7 million barrels. The U.S. refinery utilization rate also jumped about 2 percentage points week-on-week to 89.3 percent, which could indicate that more refineries have completed seasonal maintenance – faster than usual.
Additionally, with this week’s EIA numbers, faith was restored in the story around positive growth in U.S. gasoline demand, which had a knock-on effect on crude prices. For the week ending March 24, the EIA reported a 325,000-barrel per day weekly increase in finished gasoline demand to 9.5 million barrels per day, which compares to 9.2 million barrels per day during the same period last year.
The market has been looking for signs that the Organization of the Petroleum Exporting Countries (OPEC) will extend its 1.8 million barrel per day cut beyond the 6-month period that began in Jan. 2017. Uncertainty abounds concerning the willingness of individual OPEC members to agree to and then adhere to further commitments. Given fiscal exigencies facing many OPEC nations – and with oil dependent economies – it would seem unlikely that many would be willing to cede market share in the name of a further output cut that may not be effective in raising prices markedly.
On March 26, Saudi Arabia’s finance ministry announced new corporate income tax rates for oil producers, which would lower Saudi Aramco’s current rate of 85 percent down to 50 percent. The company’s production, which averaged about 10.5 million barrels per day in 2016, would still be subject to a 20 percent royalty payment.
While the measure is largely seen as a way to boost the value of Aramco’s planned partial IPO, the fact remains that the Kingdom’s finances during the two-plus year oil price downturn have been hit hard and continue to be strained. With the removal of subsidies and other government-supported benefits, the threat of intensified social unrest has been looming. Aramco is the largest contributor to the Kingdom’s coffers. The lost revenue presented by the tax rate reduction will be worked out via the distribution of dividends – details of which are not well known.
Saudi Arabia has been instrumental in the OPEC-led cuts and has indeed pulled back production by far more than its allocated share – although it is typical to slow down output at this time of year. It is important to note, however, that the Kingdom’s baseline for the cuts was at a record level, and it has continued to engage in a low-grade war for market share by lowering prices in Asia.
While the announcement of the cuts in Nov. 2016 helped lift prices by over 20 percent by the end of February, March trading has been focused on the impact on global oil markets of rising U.S. oil production from shale plays, which has acted as a counterbalance to the cuts.
Even if Saudi Arabia and the rest of OPEC agree to another round of cuts, it will be contending with a U.S. upstream sector that has been reinvigorated by $50 oil. According to some estimates, about a third of the largest U.S. producers have hedged out production for the duration of 2017 – an important factor to consider when OPEC weighs the relative merits of another output cut.
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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