Oil futures have fallen over the last few weeks despite U.S. crude oil inventories dropping on bloated refined product inventories, rising U.S. crude production and high U.S. crude imports and the dampened expectations of tightening market conditions, 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:
(Attributed to the S&P Global Platts survey of analysts)
Front-month New York Mercantile Exchange (NYMEX) crude oil traded as low as $48.59 per barrel (/b) Monday, down from above $53/b in the middle of April, on the back of a continual weakening in the oil complex since April 17. And this is despite the fact that U.S. crude oil inventories have continued to decline.
U.S. crude oil inventories have declined the past three reporting periods by a combined 6.8 million barrels to 528.7 million barrels, for the week ended April 21, according to U.S. Energy Information Administration (EIA) data.
Analysts surveyed Monday by S&P Global Platts are looking for crude stocks to show another decline for the reporting week ended Friday by 2.25 million barrels. The five-year average shows a 1.34-million barrel build for the same reporting period.
Seasonal crude draws typically begin in May, but refinery activity has been running sharply above levels usually seen for this time of year, pulling barrels from storage.
U.S. refineries processed a record 17.285 million b/d in the week that ended April 21, raising the utilization rate by 1.2 percentage points to 94.1% of capacity. By comparison, the run rate stood at just 88.1% a year earlier.
Analysts expect U.S. refiners to have dialed down the refinery run rate by 0.1 percentage point to 94% in the week that ended Friday, following a large increase in the prior week. If confirmed, that would still far exceed the rate of 89.7% from the year-ago period.
U.S. crude oil runs usually rise in March as facilities start returning from winter maintenance, stabilize in April, then pick up again in May before peaking in July as the summer driving season is fully underway.
For crude runs to hit an all-time high in the spring raises the possibility that the additional supply of products will overwhelm demand and cause refiners to eventually back off.
Crack spreads have weakened sharply over the past month, sending a signal for refiners to slow down. The front-month New York Mercantile Exchange (NYMEX) reformulated blend stock for oxygenate blending (RBOB) crack against West Texas Intermediate (WTI) traded as low as $14.98/b Monday, down from above $21/b in early April.
Summer gasoline demand may be looming, but that does not necessarily spark a lift in the crack spread. In 2016, the crack saw its highest level in March at more than $23/b, and by July was roughly half that amount.
Not only have U.S. refiners been operating at record levels, but implied** gasoline demand has been trailing the year-ago level, making it even more difficult for stocks to shed surplus barrels.
Implied gasoline demand has averaged 9.295 million b/d over the last five reporting periods, trailing the year-ago level by 77,000 b/d.
After declining for eight straight weeks, some analysts were talking about gasoline stocks returning to the five-year average, but that expectation has since been upended by atypical builds.
Gasoline stocks have risen by 4.9 million barrels over the two weeks that ended April 21 to 241 million barrels, a surplus of 19 million barrels to the five-year average.
Analysts are looking for gasoline stocks to have risen 500,000 barrels in the most recent week. From 2012 through 2016, inventories declined 256,000 barrels on average during the same reporting period.
On the Atlantic Coast, home to the New York Harbor-delivered NYMEX RBOB futures contract, gasoline stocks sit 8 million barrels above the five-year average at 67.9 million barrels.
That surplus has weighed on the crack spread and futures structure. The NYMEX June/July RBOB spread was trading Monday at contango* of around 60 points/b. In April, that spread averaged a backwardation of 25 points per barrel.
DISTILLATE BUILD SEEN
U.S. distillates stocks have also been driven higher recently by the record refinery activity, putting pressure on the ultra-low sulfur diesel (ULSD) crack.
Inventories increased 2.651 million barrels to 150.917 million barrels in the week that ended April 21, snapping a streak of 10 straight declines. Stocks still sit 22.3 million barrels above the five-year average.
Analysts expect distillate stocks to have risen 900,000 barrels last week. The five-year average shows a 327,000 barrels draw for this time of year.
Implied** distillates demand has averaged 4.16 million b/d over the past five weeks, compared with 3.94 million b/d over the same period a year ago.
The front-month NYMEX ULSD crack spread against WTI was trading Monday around $13.60/b, compared with $12.09/b a year ago.
However, the crack has fallen sharply since early April when it stood above $16/b, driven lower mostly on account of weakness in the ULSD contract.
Even though crude futures have fallen steadily since mid-April, the front-month contract has found some support on a technical basis that has also driven the crack spreads lower.
Front-month NYMEX crude dipped below its 200-day moving average Thursday, but then bounced back above that line a day later. Traders will also watch to see if Thursday’s intraday low of $48.20/b can hold this week.
A weaker dollar could also be helping prevent further declines in crude futures. The U.S. Dollar Index has been around 99 points over the last week, down from above 101 as recently as April 11 and 103 at the start of the year.
The Federal Open Market Committee (FOMC) will wrap up its two-day meeting Wednesday and is widely expected to hold interest rates steady.
The bigger market-moving event for the dollar could be Friday’s April U.S. jobs report, which in turn could influence the likelihood of interest rate hikes by the FOMC later this year.
Traders will also be keeping an eye on Wednesday’s EIA report for an update on import figures and production levels, both of which have emerged this year as headwinds for higher crude prices.
Despite an OPEC supply cut deal going into effect January 1, U.S. crude oil imports have averaged 8.175 million barrels per day (b/d) so far this year, compared with 7.861 million b/d during the same period in 2016.
Imports likely fell last week after averaging 8.912 million b/d in the week that ended April 21, the second highest level of the year.
U.S. crude oil production has increased by 495,000 b/d this year to 9.265 million b/d, the highest level since August 2015, according to EIA estimates.
* 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 US distribution system, not actual end consumption.
Source: PlattsPrevious Next
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