Oil futures prices have dropped during the last month, in large part on concerns that persistent U.S. production growth will likely lead to builds in crude oil inventories on any drop off in refinery demand, 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 fall 3.25 million barrels
Refinery utilization expected to be unchanged
Gasoline stocks expected to decline 900,000 barrels
Distillate stocks expected to rise 500,000 barrels
Spring refinery demand was strong, with crude runs setting two weekly all-time highs and pushing crude stocks lower 10 of the last 11 reporting periods, EIA data shows.
Even with inventories chipping away at the surplus to the five-year average, prompt-delivery New York Mercantile Exchange (NYMEX) crude oil futures fell last week to lows not seen since August 2016, near $42 per barrel (/b).
Such price action suggests possible market trepidation that refiners will start scaling back operations, removing a key driver behind the tightening of crude inventories since April.
Analysts surveyed Monday by S&P Global Platts expect the latest reporting period ended last Friday will show an unchanged refinery run rate at 94% of capacity. U.S. refinery utilization reach a high of 95% the week ended May 26 and has since then averaged approximately 94.2%.
The possibility that U.S. refinery utilization may have likely peaked this calendar year, when combined with rising output, points to the prospect of higher crude oil inventories.
However, there is market speculation that the EIA’s pending inventory report could be skewed by Tropical Storm Cindy, which may have delayed crude imports and affected production numbers.
Analysts are looking for U.S. crude oil stocks to show a drawdown of 3.25 million barrels for the latest reporting week. Such would compare to an average decline of 1 million barrels for the same reporting period during the 2012 to 2016 period.
If confirmed, such a headline number would appear bearish. However, any downside price risk could be muted by any trader sentiment that the tropical storm played a greater role than actual fundamentals might suggest.
U.S. crude oil imports, excluding barrels from Canada, averaged 4.587 million barrels per day (b/d) last week, according to an analysis of U.S. Customs data by Platts Analytics, a forecasting and analytics unit of S&P Global Platts. Crude imports, excluding Canada, averaged 5 million b/d during the five weeks ending June 9, EIA data shows.
Regarding Tropical Storm Cindy, there were 40 production platforms in the Gulf of Mexico that evacuated personnel last week in preparation for the storm.
U.S. crude oil production has risen steadily this year, up 580,000 b/d since the end of 2016, to 9.35 million b/d, the most since August 2015.
With the number of active rigs also climbing, production is likely poised to keep rising, with some analysts pegging output at 10 million b/d by next year if prices remain around current levels.
SALINA CRUZ REFINERY FIRE
Another event that could temporarily affect inventory statistics has been the fall-out from Pemex’s 330,000 b/d refinery at Salina Cruz, Mexico shut since mid-June because of a fire.
Mexico suspended crude exports from its Salina Cruz terminal on Pacific Coast because of the refinery outage. Crude exported from Salina Cruz consists mostly of Maya and Isthmus grades headed to California and Japan.
With the refinery’s restart date pushed back to July 30, the gap in supply has turned into a boon for U.S. Gulf Coast refiners who were already feasting on strong export demand from Venezuela.
Another consequence of strong Latin American demand has been the premium in the gasoline market for Gulf Coast waterborne 87 unleaded over NYMEX reformulated blend stock for oxygenate blending (RBOB) futures, which specifies New York Harbor as the delivery point.
The poor arbitrage economics also reflects ample stocks on the Atlantic Coast where inventories sit 6.243 million barrels above the five-year average at 67.605 million barrels. A signal of how the ‘closed arbitrage’ has reduced demand for shipping gasoline from the Gulf Coast to the Northeast, the Colonial Pipeline said last week that a cycle on its gasoline-only Line 1 fell short of full capacity for the first time since 2011.
Total gasoline stocks were 241.866 million barrels the week ending June 16, a surplus of 22.751 million barrels to the five-year average. Analysts are looking for a 900,000-barrel decline, compared to an average build for this period of approximately 820,000 barrels during 2012 to 2016.
SMALL DISTILLATE BUILD EXPECTED
On Monday, Colonial said that nominations fell below capacity on its distillate-only Line 2, which market sources attributed to a closed arbitrage for moving product from Texas to New Jersey.
Atlantic Coast combined stocks of low- and ultra-low sulfur diesel (ULSD) was nearly 52 million barrels the week ending June 16, a surplus of 18.6 million barrels to the five-year average.
The pull of Latin American demand could also be diverting supply away from the U.S. Northeast and Europe. Expected arrivals of distillates from the U.S. Gulf Coast (USGC) into Europe and the Mediterranean are estimated to total 520,000 metric tons (mt) to date into July. This is down from 1.47 million mt in June, according to data from cFlow, S&P Global Platts trade flow software.
Strong exports will be needed to prevent further builds if ULSD production stays high after having averaged 4.96 million b/d the week ending June 16, the most since 2014.
Distillates stocks have increased the last four reporting periods by 6.156 million barrels, putting inventories 22.3 million barrels above the five-year average at 152.5 million barrels.
Analysts expect distillate stocks rose 500,000 barrels last week, versus an average draw of roughly 230,000 barrels for the same reporting period.
Source: PlattsPrevious Next