17-02-2017

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

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Prices in the oil complex remained firm Wednesday despite inventories of U.S. crude oil reaching an all-time high and marking the second consecutive week traders have chosen to focus on expectations of tighter supply conditions head, according to U.S. Energy Information Administration (EIA) data released Wednesday and a commentary by Geoffrey Craig, S&P Global Platts oil futures editor.

U.S. crude stocks set a record last week for the most barrels in storage, topping the previous all-time high of 512.1 million barrels from April 2016, today’s EIA data showed.

Inventories rose 9.527 million barrels to 518.119 million barrels in the week ended February 10, according to EIA data. Analysts surveyed Monday by S&P Global Platts expected a build of 3.25 million barrels.

While it is normal for crude oil inventories to rise in the winter, the size of the builds this year to date have been unusually large.

During the last six reporting periods, crude oil stocks have risen 39.1 million barrels, compared with 17.3 million barrels on average from 2012-16 during the same time period.

Despite soaring inventories, crude futures have held steady. Front-month New York Mercantile Exchange (NYMEX) crude oil hovered Wednesday afternoon around $53 per barrel (/b), firmly within the $52-$54/b corridor where prices have been since January.

“The market continues to look past the poor current state of affairs, towards a brighter future that is expected to appear thanks to the OPEC/non-OPEC supply cuts,” said Anthony Starkey, energy analysis manager at Platts Analytics, the forecasting and analytics unit of S&P Global Platts.

“This optimism is certainly going to skew future expectations, however. A premature rise in oil prices is providing tailwinds to production that would otherwise have stayed offline had prices remained lower,” he said.

A significant increase in U.S. crude production represents one scenario that could derail those expectations for a tighter market on the back of the OPEC/non-OPEC supply cuts.

U.S. crude oil production averaged 8.977 million b/d last week, according to EIA estimates, up from a low of 8.428 million b/d the week ended July 1.

An S&P Global Platts survey found OPEC members achieved a 91% compliance rate in January, but some analysts are skeptical adherence will remain that high through June, when the current deal expires.

Speculators have accumulated an aggressively bullish stance toward NYMEX crude futures. Money managers’ length recently rose to an all-time high, according to the U.S. Commodity Futures Trading Commission.

A major question is whether speculators will grow impatient waiting for the market to tighten. If speculators grow impatient, selling pressure could quickly escalate if the desire by money managers to head for the exits turns into a stampede.

Some traders have already begun preparing for a selloff by purchasing put options, which provide the holder with the right, but obligation, to sell crude futures at a pre-determined prices.

Traders are “buying more put options than calls to protect themselves against what seems to be a very likely drop in the market,” said Vito Turitto, manager for quantitative analysis at S&P Global Platts. The buying pressure on NYMEX crude put options has gone up, which in turn has caused implied volatility to increase, he said.

Front-month implied volatility on Tuesday was 37.1%, up from 33.39% Monday and 25.12% Friday, according to data provider GlobalView.

March NYMEX crude options expire Wednesday. For April options, the contract with the most open interest was the $50/b put, with 27,737 contracts as of Tuesday. Open interest data is delayed on day.

CRUDE RUNS FALL

Another difficulty facing market bulls is seasonal weakness, as refinery demand typically slows in January and February as refiners perform winter maintenance.

Crude runs fell 435,000 b/d last week to 15.458 million b/d, pulling the refinery utilization rate 2.3 percentage points lower to 85.4% of capacity.

The utilization rate has dropped from 93.6% the week ended January 6, reflecting the impact of winter maintenance as refiners take units offline to perform planned repairs.

If last week marked the depth of the turnaround season, then the run rate should climb the next few weeks. The trough for refinery utilization last winter was 86.1% seen the week ended February 5.

On the U.S. Gulf Coast (USGC), the epicenter of the U.S. refining complex, the utilization rate fell 1.3% to 84.9% of capacity.

Not only is the region dealing with planned repairs, but a pair of fires last week also disrupted operations at Valero’s 180,000 b/d Meraux, Louisiana, refinery and Total’s 225,500 b/d Port Arthur, Texas, refinery.

Gulf Coast crude stocks rose 6.825 million barrels last week to 274.396 million barrels, which was the largest build by region.

USGC crude imports plunged 591,000 b/d to 3.376 million b/d, helping mitigate the size of the region’s crude build.

Since the start of the year, Gulf Coast imports have averaged 3.5 million b/d, compared with 3.2 million b/d over the second half of last year.

Given the transit time to reach U.S. ports from the Arabian Gulf, higher imports so far this year likely reflect a rush to import before the OPEC supply cut went into effect January 1.

While imports will likely tail off soon, the influx so far this year has prevented any drawdown in US crude stocks, despite OPEC cuts being in place.

GASOLINE STOCKS BUILD

Record-high U.S. gasoline inventories have also emerged as an obstacle standing in the way of a tighter oil market. They increased 2.846 million barrels in the week ended February 10 to 259.063 million barrels, exceeding the previous all-time high of 258.693 million barrels from February 2016.

Analysts were looking for gasoline stocks to show a drawdown of 500,000 barrels last week. Stocks rose 686,000 barrels on average during the same reporting week from 2012-16, EIA data showed.

Implied* gasoline demand fell 508,000 barrels last week to 8.433 million b/d, which was 770,000 b/d below the year-ago level.

Over the last six weeks, implied demand has averaged 8.377 million b/d, compared with 8.864 million b/d during the same period a year ago.

The overhang of stocks has been particularly acute on the U.S. Atlantic Coast (USAC), which saw a build of 2.44 million barrels last week.

At 76.285 million barrels, USAC stocks sit at a 17.1% surplus to the five-year average. The Atlantic Coast is home to the New York Harbor-delivered NYMEX reformulated blend stock for oxygenate blending (RBOB) futures contract.

Ample USAC stocks have put pressure on the front-month NYMEX RBOB crack price spread against West Texas Intermediate (WTI). The crack was hovering Wednesday afternoon at $11.8/b, down from more than $17/b in late December.

DISTILLATES STOCKS DRAW SLIGHTLY

U.S. distillates stocks decreased 689,000 barrels to 170.057 million barrels in the week ended February 10, EIA data showed. Analysts were looking for a decline of 1.25 million barrels.

Inventories normally experience drawdown starting in January as refinery activity slows and heating fuel demand rises, but stocks this year have held steady at around 170 million barrels.

U.S. distillate exports fell 105,000 b/d last week to 992,000 b/d, which helped push USGC stocks of low- and ultra-low sulfur diesel up 526,000 barrels to 45.299 million barrels.

Midwest combined stocks rose 392,000 barrels to 34.04 million barrels, while Atlantic Coast combined stocks drew 1.995 million barrels to 58.711 million barrels.

Source: S&P Global Platts

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