22-03-2017

S&P Global Platts Preview of U.S. EIA Data: Likely Crude Oil Stock Build Could Add to Downside Price Risk

SPglobal

Analysts surveyed by S&P Global Platts Monday are looking for U.S. commercial crude oil inventories to show a rise of 2 million barrels for the latest reporting week ended March 17 and this is casting doubt on the lasting impact of output cuts following the November 30 agreement between OPEC and non-OPEC countries, according to an S&P Global Platts preview of this week’s pending U.S. Energy Information Administration (EIA) oil stocks data.

Survey of Analysts Results:
Crude stocks expected to rise 2 million barrels
Gasoline stocks expected to fall 2.25 million barrels
Distillate stocks expected to drop 1 million barrels

S&P Global Platts Analysis:
Following the OPEC/non-OPEC agreement, crude futures initially rose sharply before settling into a tight corridor in the low-to-mid-$50s per barrel (/b) through February, even as bearish headlines, including nine consecutive EIA inventory reports showing crude stocks rising, were swept under the rug.

At 528.156 million barrels, U.S. commercial crude oil stocks are 36.21% greater than the five-year average for the same reporting week and up 35.956 million barrels from the same time last year.

Despite this, speculators piled into long (bought) positions, with the net length of money managers reaching a record-high 405,328 futures contracts the week ending February 21, according to U.S. Commodity Futures Trading Commission (CFTC) data.

At the same time, oil producers, generally comfortable with current price levels, have sought to hedge their production and have increased their short (sold) positions dramatically, with the producer/merchant category’s net short position reaching record 341,911 contracts in the week ended February 21.

With an enormous gulf and billions of barrels of deliverable crude oil separating different classes of traders, crude futures looked set to break out of the tight trading range and did just that on March 8 when prompt-month New York Mercantile Exchange (NYMEX) light sweet crude oil futures settled $2.86 lower at $50.28/b, falling to its lowest level since the OPEC/non-OPEC deal was announced on March 14 at $47.72/b.

Since then, caution seems to be swirling among money managers who slashed their net length position in futures by 34,579 futures contracts to 383,767 contracts in the week ended March 14.

However, many bank analysts continue to push an optimistic outlook for crude prices in 2017. On Wednesday, Citi published a note stating that the recent slide below $50/b was “a buying opportunity for 2017.”

“The OPEC cuts are real and are cleaning up the market as can be seen in the strong Dubai crude market and the steep drop in floating storage,” the Citi analysts said.

Other analysts are suggesting a more cautionary approach, including those at Platts Analytics, a forecasting and analytics unit of S&P Global Platts, who downplayed last week’s surprise 237,000 b/d draw in crude stocks.

“Imports were significantly lower week on week, and while some may view this as the long awaited impact of the OPEC supply cuts, other data points suggest that may not necessarily be the case [yet],” Platts Analytics analysts wrote. “Record high crude oil inventories along the USGC and Houston Ship Channel closures due to fog have created congestion in the area.”

U.S., LIBYA OUTPUT PRESENT CONUNDRUM FOR OPEC

Volatile crude time spreads are again reflecting a bullish tone.

Initial compliance with OPEC-led output cuts saw the one-month to 12-month NYMEX crude oil contango* narrow to minus 56 cents/b in late-February, but subsequent doubts saw that same spread blow out to minus $2.40/b last week, largely due to prompt NYMEX crude falling to a three-and-a-half month low.

Since then, however, the spread has narrowed again, settling at minus $1.68/b Friday.

Implied** volatility tells a similar picture, having blown out in line with weaker futures only to have recovered last week, buttressed in part by headlines reflecting confidence from OPEC itself.

In both cases, the volatility goes hand in hand with scrutiny on Saudi Arabia’s commitment to defend prices over market share.

At the CeraWeek conference in Houston on March 7, Saudi oil minister Khalid Al-Falih said there would be no “free rides” for U.S. shale oil producers who have dusted off the cobwebs from idle drilling rigs in response to higher prices following the OPEC/non-OPEC agreement.

Despite Al-Falih’s statement, at this point, it seems U.S. shale producers are likely the biggest winners from the coordinated output cuts.

Weekly EIA data showed U.S. production rising 21,000 b/d to 9.109 million b/d in the week ended March 10, meaning that U.S. producers have added 412,000 b/d in output since OPEC reached its historic agreement at the end of November.

At the same time, production out of Nigeria and Libya, both exempt from the output agreement owing to civil turmoil, appears to be rising.

Libyan oil production is averaging 646,000 b/d, up slightly over the past two weeks as output from the Waha oil fields restarted on news that oil exports from the ports of Es Sider and Ras Lanuf are set to resume, Mustafa Sanalla, chairman of state-owned National Oil Company, said Monday.

Sanalla also said in an emailed statement that loadings from the 340,000 b/d Es Sider and 220,000 b/d Ras Lanuf key terminals will restart “very soon”.

The Libyan National Army (LNA) regained control of the Es-Sider and Ras Lanuf oil export terminals early last week after Benghazi Defense Brigades ousted the LNA from the 340,000 b/d Es-Sider and 220,000 b/d Ras Lanuf terminals on March 3.

Many banks, including Citi, expect Saudi Arabia to continue to defend prices and for OPEC countries to extend their agreement despite rising production in other parts of the world, but other market participants point to the negligible impact on global crude stocks as a “conundrum” for OPEC policy makers.

“Price stabilization or a balanced market in 2017 may be achieved by current output restraint but inventory objectives are unlikely to be met,” BNP Paribas analysts wrote on March 9. “This begs the question of whether OPEC will extend the period of output cuts.”

The International Energy Agency (IEA) reported that Organization for Economic Cooperation and Development (OECD) crude oil stocks rose by a whopping 48 million barrels in January to 3.03 billion barrels, while preliminary data only shows stocks falling 5 million barrels in February.

“The January stock build by itself erased around 40% of the cumulative drop in OECD stocks seen between July and December 2016,” the IEA said.

PRODUCT INVENTORIES EXPECTED TO DRAW

While recent EIA and IEA data reflects bloated crude inventories, a relatively weak global gasoline market and the spring refinery maintenance season may undercut significant increases in crude futures.

While U.S. gasoline stocks have declined by 12.784 million barrels million since hitting a record 259.063 million barrels in the week ended February 10, inventories remain 6.17% above the five-year average.

Gasoline demand has underwhelmed in recent weeks, with EIA data showing product supplied — a proxy used by many analysts to derive implied demand — hit a three-year low of 8.039 million b/d in the week ended January 20.

The front-month NYMEX reformulated blend stock for oxygenate blending (RBOB)/West Texas Intermediate (WTI) crack price spread settled at $19.54/b on Monday, up from levels seen in recent week but still below the $21.11/b a year ago.

Globally, gasoline crack spreads point to a well-supplied market, even as refiners enter seasonal maintenance.

The Platts Eurobob (European reformulated blend stock for oxygenate blending)-to Brent crude oil crack swap settled at $11.45/b Monday, well below the $14.40/b seen a year ago, while the Singapore 92 RON/Dubai crack swap is also weaker at $10.55/b, compared to $13.07/b a year ago.

Analysts surveyed expect U.S. gasoline stocks to have fallen 2.25 million barrels.

On the other hand, global diesel markets look tighter.

U.S. distillates stocks have shed 13.414 million barrels since January 27 to stay near 157.303 million barrels.

The prompt NYMEX ultra-low sulfur diesel (ULSD)-to-WTI crack settled at $15.41/b Monday considerably lower than $10.95/b a year ago, while the Platts free-on-board (FOB) Amsterdam-Rotterdam-Antwerp diesel barge/Brent crude crack swap settled at $9.50/b, up from $7.34/b last year.

Analysts surveyed expect U.S. distillates stocks to have fallen 1 million barrels.

For more information on crude oil, visit the S&P Global Platts website.

* Contango is the industry vernacular for the condition whereby prices for nearby delivery are lower than prices for future-month delivery.

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

Source: S&P Global Platts

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