Oil Prices Settle Down Slightly After Mixed Trading

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Following a bearish report released by the American Petroleum Institute (API) Tuesday evening, oil prices were trading down Wednesday morning before market open. The API estimated that for the week ending Jan. 20, U.S. crude inventories rose by 2.9 million barrels; gasoline inventories increased by 4.9 million barrels; and, distillate (including diesel and heating oil) rose by 2 million barrels.

Wednesday’s data release from the Energy Information Agency (EIA) largely confirmed the API’s estimates, and oil fell further in early trading. Despite the less than positive fundamentals, oil prices rose in intraday trading off news that the Dow crossed the 20,000 level for the first time ever – which lifted the tide for all asset classes, including commodities.

The front-month WTI contract settled down .8 percent Wednesday on the NYMEX at $52.75 per barrel, while the Brent front-month contract fell about .7 percent on the ICE to $55.08 per barrel.

For the week ending Jan. 20, the EIA estimated that U.S. crude inventories rose by 2.8 million barrels, largely in line with expectations. Gasoline inventories rose by 6.8 million barrels, versus expectations for a much smaller build of about 500,000 barrels. Distillate stocks remained flat week over week, versus analyst estimates for a drop of about 1 million barrels.

According to the EIA, U.S. gasoline demand for the last four-week period is down 4.7 percent compared to the same time last year. The weekly U.S. refinery utilization rate fell from 90.7 percent to 88.3 percent, with the U.S. Gulf Coast (PADD 3) showing the greatest decrease, with a drop of 4.6 percent to 87.4 percent. The build in gasoline stocks and decrease to refinery output could be attributed to the beginning of refinery turnaround season, when capacity is taken offline.

Since the Organization of the Petroleum Exporting Countries (OPEC) and large non-OPEC producers agreed on Nov. 30, 2016 to a coordinated cut of 1.8 million barrels per day, both the U.S. and global benchmarks have risen considerably, and have been locked in a $50 to $60 per barrel trading band.

OPEC and Russia, which leads the non-OPEC portion of the cuts, have assured markets of a high level of commitment to the production pullback. The first Joint OPEC-Non-OPEC Ministerial Monitoring Committee (JMMC), held Jan. 22 in Vienna, communicated that 1.5 million barrels per day of production was taken off the market thus far in 2017 – which represents approximately an 80 percent adherence level to the cuts.

The market has already priced in the benefits of high compliance levels from OPEC however, and is more focused on downside risk, presented by the potential for U.S. tight oil production to enter global supply in high volumes. The conditions are ripe for U.S. production to rise materially in 2017.

The oil rig count has been rising apace – with 29 rigs added for the week ending Jan. 20 – the highest number of additions since April 2013. For the week ending Jan. 20, the EIA reported that oil production rose slightly, to 8.961 million barrels per day. U.S. onshore players have been increasing 2017 capital budgets after consecutive years of savage cuts.

During the downturn, many operators have been able to drive production cost efficiencies and now aim to deploy these new capabilities in the Permian, Bakken and Eagle Ford plays. Already in 2017, a flurry of deals for acreage and additional take-away capacity has occurred in the Permian basin, which portends a material uptick in production for 2017 and 2018. U.S. production could rise as high as 10 million barrels per day by the end of 2017, according to some estimates.

President Donald Trump’s energy policy is undeniably geared toward encouraging U.S. and Canadian oil production, and the build-out of oil and gas infrastructure. President Trump signed executive orders Jan. 24 to ease the approval process and eventual construction of the 830,000 barrel per day-Keystone XL pipeline, running from Hardisty, Alberta to Steele City, NE, and the 570,000 barrel per day-Dakota Access Pipeline from the Bakken/Three Forks play in North Dakota to Patoka, IL. Crude imports from Canada are on the rise, and should be facilitated by the increased capacity with the eventual construction of Keystone XL. Some analysts estimate that imports from Canada could rise to 4 million barrels per day, which, at current demand levels, would imply the almost complete displacement of barrels from OPEC nations.

Delia Morris has worked in the international upstream oil & gas industry for over 13 years, and is currently Director of 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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