22-07-2016

S&P Global Platts Analysis Of U.S. Energy Information Administration (EIA) Data

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A build in U.S. gasoline stocks for the latest reporting week, announced by the Energy Information Administration (EIA), partly overshadowed the ninth consecutive decline in crude inventories, according to an analysis from S&P Global Platts.

Oil futures initially dipped after the release of the EIA data, which extended a pattern of drawdowns in crude oil stocks and builds in refined products inventories.

Stocks of low- and ultra- low sulfur diesel (ULSD) on the U.S. Atlantic Coast (USAC), home to the New York Harbor-delivered New York Mercantile Exchange (NYMEX) ULSD futures contract, rose 1.969 million barrels to 55.558 million barrels, a 31% surplus to the level from a year ago.

Total distillate stocks fell 214,000 barrels last week to 152.783 million barrels, versus analysts’ expectation of an 875,000 barrel-increase.

However, gasoline inventories showed a build of 911,000 barrels last week to 241 million barrels. Analysts surveyed Monday by S&P Global Platts were looking for a drawdown of 625,000 barrels.

The EIA data showed a “pretty run of the mill set of numbers” according to Anthony Starkey, manager for energy analysis at Platts Analytics, a forecasting and analytics unit of S&P Global Platts.

“What we don’t need right now is run of the mill, but outsized draws to give an indication that supply and demand are converging at the necessary pace to generate large stock drawdowns and warrant much needed higher prices for the upstream sector,” Starkey said.

The inability for gasoline inventories to shed surplus barrels sitting in storage has been a source of weakness across the oil complex this summer.

Since the week ended April 1, the surplus of gasoline stocks to the five-year average for the same reporting period has been in the range of 10%-13%, according to EIA data.

Gasoline inventories for the week ended July 15 were 12.1% above the average from 2011-15 for the same time of year.

RBOB CRACK WEAKENS FURTHER

On the Atlantic Coast, home of the delivery point for the NYMEX RBOB futures contract, USAC stocks dipped 61,000 barrels last week to 72.003 million barrels, a 24.1% surplus to the five-year average for this time of year.

One reason Atlantic Coast inventories have been plentiful is imports flowing into the region. Over the last ten weeks, gasoline imports have averaged 748,000 b/d, compared with 629,500 b/d over the same period a year ago.

Gasoline stocks have remained stubbornly high despite strong demand. Implied* demand has averaged 9.73 million b/d the last four weekly reporting periods, less than 1% below what the EIA estimated was a record high the week ended June 17.

Slack in the gasoline market has dragged the RBOB crack lower. The RBOB crack against Intercontinental Exchange (ICE) Brent was around $10.60 per barrel (/b) Wednesday afternoon, its lowest level since December. In July 2015, the RBOB crack was above $20/b and even topped $27/b briefly.

The RBOB crack could tighten this autumn as refiners perform seasonal maintenance and less gasoline hits the market.

Another possibility is refiners cut runs earlier than normal because of what they perceive as paltry margins, a scenario that would depress crude demand.

Margins are hitting “run cut levels” and that could lead to a “deeper and longer” turnaround season, Citi Research analysts said Wednesday.

Another way gasoline stocks could reduce their surpluses would be for refiners to switch yields back toward distillates, they said.

But yield switching could also inflate distillate stocks, considering industrial demand looks structurally weak, the bank analysts said.

“If it is another warm winter then distillates will get very sloppy and economic run cuts look likely in the fourth quarter,” Citi said.

CRUDE RUNS JUMP

Against this backdrop, one bullish sign emerging Wednesday from the EIA data was the fact that refinery utilization rose last week.

Crude oil runs increased 319,000 b/d last week to 16.863 million b/d, pushing refinery utilization 0.9 percentage points higher, far exceeding analysts’ expectation of an increase of 0.1 percentage point.

At 93.2% of capacity, refinery utilization equaled its highest level of the year, though it still lagged the run rate from a year ago, which stood at 95.5% of capacity.

Signs of greater refinery activity minimized concerns over run cuts, at least for now, and possibly served as a catalyst for crude futures bouncing off session lows and into positive territory.

In afternoon trading, NYMEX August crude was up 40 cents at $45.05/b and ICE September Brent was 63 cents higher at $47.29 per gallon (/gal).

The uptick in refinery utilization helped push crude inventories lower last week.

U.S. commercial crude oil inventories fell by 2.342 million barrels to 519.462 million barrels, though stocks still sit 34.7% above the five-year average for this time of year, according to the EIA data.

Crude oil inventories typically decline in July as refiners increase their runs during periods of heightened gasoline demand.

Last July, crude stocks fell 2.622 million barrels each week on average, though last week’s decline exceeded the 1.8 million-barrel average draw from 2011-15 during the same reporting period.

Analysts surveyed by S&P Global Platts had expected crude stocks to have declined 1.25 million barrels.

The Gulf Coast accounted for an outsized share of the draw, with regional stocks falling 2.533 million barrels to 269.627 million barrels, in large part due to refiners’ increased throughput.

U.S. crude oil inventories fell despite an increase in imports of 293,000 b/d to 8.134 b/d, the fifth-highest level in the past 20 reporting weeks. Imports from Colombia, Venezuela, Iraq and Kuwait rose, while imports from Saudi Arabia and Nigeria fell.

LOWER 48 OUTPUT FALLS

U.S. crude oil production rose marginally by 9,000 b/d to 8.494 million b/d, driven by an increase in Alaska. Output from the Lower 48 states fell 29,000 b/d to 8.045 million b/d, marking the 19th consecutive weekly decline.

The steep declines in U.S. oil output may be arrested in the coming weeks, with the Baker Hughes rig count showing increased drilling activity over the past month as crude futures have stabilized in the $45-$50/b range.

On Friday, Baker Hughes reported that U.S. oil producers added six active drilling rigs, bringing the total to 357, up from a low of 316 in the week ended May 27.

Halliburton — the world’s second largest oilfield services company — predicts that the U.S. rig count will increase further in the coming months.

“We believe the North America market has turned,” the company said Wednesday in a news release reporting quarterly earnings. “We expect to see a modest uptick in rig count during the second half of the year.”

A year ago, there were 638 rigs drilling for oil in the U.S. and the rig count reached a peak of 1,609 rigs in October 2014.

* Implied demand is the amount of product that moves through the U.S. distribution system, not actual end consumption.

Source: S&P Platts

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