Oil Prices Fall - Fundamentals Trump Russian Rhetoric

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Following the Wednesday morning release from the Energy Information Agency’s (EIA) closely-watched Weekly Petroleum Status report, oil prices slipped off a much larger than expected build to crude inventories. Analysts had been anticipating around a one million barrel rise in oil stocks for the week ending Nov. 11; the EIA reported an increase of 5.3 million barrels.

The front-month U.S. West Texas Intermediate (WTI) contract settled down .6 percent Wednesday on the NYMEX at $45.57 per barrel, while the Brent front-month contract fell .7 percent on the ICE to $46.63 per barrel.

Oil prices gained almost 6 percent Tuesday on renewed hope that an output cut by the Organization of the Petroleum Exporting Countries (OPEC) would come to fruition. However, oil prices opened down Wednesday morning due to a bearish report from the American Petroleum Institute (API). Issued after the market closed Tuesday evening, the report estimated crude inventories had risen by 3.6 million barrels for the week ending Nov. 11.

In a volatile day of trading, oil prices inched up after Russia’s Energy Minister Alexander Novak indicated that the country was willing to support OPEC with any decisions made at the Nov. 30 meeting in Vienna. As the world’s largest producer of crude, and heavily reliant on oil export revenues, Russia has been a reluctant participant to any coordinated cut. In fact, Russia had most recently been indicating that it was more comfortable with a freeze versus a cut, which, if using the latest production figures from October, implies Russian output at 11.2 million barrels per day, and OPEC at 33.83 million barrels per day.

Considering a global supply overhang estimated to be as much as one million barrels per day and coupled with record production coming out of many countries, such as Saudi Arabia and Iraq, an OPEC cut would need to be at least 800,000 barrels per day to begin to have any meaning. That being said, OPEC is only in discussions around a cut between 200,000 barrels per day and 700,000 barrels per day.

The EIA also reported an increase to gasoline inventories of 700,000 barrels, and a 300,000-barrel build to distillate stocks (including diesel and heating oil). Stocks for crude, gasoline and distillate are all above the upper limits of their respective average ranges for this time of year, according to the EIA. Crude inventories at Cushing, OK – the delivery hub for the WTI contract – rose by almost 700,000 barrels which weighed on the U.S. benchmark.

U.S. refineries are emerging from the seasonal maintenance period, which was reflected by an increase to the overall utilization rate – from 87.1 percent to 89.2 percent. While refineries take on more crude as more capacity comes online, the level of U.S. net crude imports (including the Strategic Petroleum Reserve) rose significantly week over week – by 910,000 barrels per day, which more than offset a rise in refinery runs of about 300,000 barrels per day.

Another factor that may be at play, which could explain the unusually high increase to crude imports for this time of year, is that refineries are preparing for the possible imposition of import taxes on foreign crude after President-elect Donald Trump comes to office in January 2017, which would drive up input prices. If history is any guide, when President Ronald Reagan came to office in January 1981, he reduced restrictions on foreign crude imports, which some argue helped contribute to a large crude glut and an eventual price crash. Admittedly, OPEC, at the time, was a much more powerful and cohesive force in global oil markets, but if Trump does a “reverse-Reagan” and throws up tariffs on foreign crude, would that portend the lifting of WTI prices? Perhaps.

Although the U.S. refining system is largely configured to handle heavy, sour crudes from OPEC countries like Saudi Arabia – and despite already having been gradually displaced in the U.S. crude import market by heavy crudes supplied by Canada – the Saudis are already voicing concern about a change in policy. On Tuesday, Saudi’s energy minister Khalid al-Falih said at an energy conference, “At his heart President-elect Trump will see the benefits and I think the oil industry will also be advising him accordingly that blocking trade in any product is not healthy.”

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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