U.S. crude oil inventories likely need to keep falling by significant amounts for crude oil futures to break above current levels near $50 per barrel (/b) and prevent an ongoing rally from stalling out, according to an S&P Global Platts preview of this week’s pending U.S. Energy Information Administration (EIA) oil stocks data.
Inventories typically decline in the summer, but the size of recent draws has been larger-than-usual. Stocks have drawn 25.8 million barrels the last four weeks, compared with 13.1 million barrels on average from 2012-16.
Analysts surveyed Monday by S&P Global Platts expect stocks fell a further 2.8 million barrels last week, which if confirmed, would exceed the five-year average showing a 2.1-million barrel decline.
At 483.4 million barrels, inventories remain 24% above the five-year average for this time of year, but that is also the lowest the surplus has been in percentage terms so far this year.
Tightening U.S. supplies have underpinned bullish enthusiasm as evidenced by money managers’ net length in NYMEX crude rising to its highest level since mid-April when crude was above $50/b.
By early May, however, crude prices were down to $45/b, raising the question of whether current levels can be sustained particularly when refinery demand ebbs with the start of the autumn maintenance period.
The amount of crude processed by refiners averaged 17.285 million b/d the week ended July 21, which was 225,000 b/d below the all-time high set the week ended May 26, according to Energy Information Administration data.
Crude runs have topped 17 million b/d almost continuously since the week ended April 21, a mark that was never broached even once last year.
Analysts expect refinery utilization dipped 0.1 percentage point last week to 94.2% of capacity. A year ago the run rate averaged 93.3% of capacity.
Despite high levels of refinery activity, demand has proved strong enough for product stocks to draw, which has supported crack spreads and encouraged refiners to keep runs high.
The NYMEX RBOB crack spread against WTI, which has averaged $18.75/b this month, compared with an average of $13.21/b in July 2016.
CRUDE CONTANGO NARROWING
Term structure has also strengthened of late. NYMEX crude’s front-month/second-month spread was in a razor-thin contango of around 9 cents/b Monday afternoon, and could be on the verge of a sustained backwardation for the first time since October 2014.
This narrow contango has already removed the financial incentive for traders to store barrels, a likely factor contributing to the drawdown of Cushing, Oklahoma stocks.
Inventories at Cushing, the delivery point for the NYMEX crude futures contract, have fallen 10 straight weeks by a total of 10.4 million barrels to 55.8 million barrels, the fewest since November 2015.
ICE Brent’s front-month/second-month spread took an even sharper turn last week, going from a contango of 3 cents/b Thursday to a backwardation of 30 cents/b Friday.
That spread is often volatile just before the expiry of the prompt contract, which happened Monday, as traders rush to cover short positions.
However, ICE Brent’s entire curve has flattened which could be chalked up to Saudi Arabia’s recent pledge to cap exports in August at 6.6 million b/d along with some bullish indicators in the physical market.
Crude differentials strengthened notably last week for a range of key grades in the Mediterranean, North Sea and West African markets.
A tighter Atlantic Basin could present more export possibilities for U.S. crude producers who already have their eyes trained on global markets given the premium that Brent and Dubai enjoy over WTI.
REFINERY OUTAGES CONTINUE
Export markets have also been a boon for US refiners who have watched as a number of unexpected problems impacting refineries abroad that have opened doors for them as they try and fill any supply gaps.
The latest upset came Saturday when a fire broke out at Europe’s largest refinery causing the owner, Shell, to take a number of units offline at the 404,000 b/d facility in Pernis, Netherlands.
In the Mediterranean, the 100,000 b/d refinery in Elefsis, Greece has been shut since an incident with its hydrogen unit earlier this month, while a reformer at Sonatrach’s Skikda, Algeria refinery was halted last week.
These supply disruptions should continue to support distillate flows from the Gulf Coast into Europe and the Mediterranean, which tally around 1 million metric tons (mt) so far in August, according to cFlow, Platts trade-flow software.
Gulf Coast stocks of low and ultra low sulfur diesel sit at 42.9 million barrels, a surplus of around 6.2 million barrels to the five-year average.
Total distillate stocks are expected to have drawn 900,000 barrels last week, versus an average decline of 275,000 barrels for the same reporting period from 2012-16.
RBOB CRACK STRONGER THAN LAST YEAR
Last week also saw a spate of U.S. refinery problems involving fluid catalytic cracking units, which could have contributed to an expected draw in U.S. gasoline stocks.
Citgo’s 427,800 b/d Lake Charles, Louisiana refinery was heard to have shut at least one fluid catalytic cracking (FCC) unit for unplanned work.
Monroe Energy’s FCC was running last week at reduced rates following a problem with the isomerization unit, while planned work began on an FCC and alkylation unit at Marathon Petroleum’s refinery in Texas City.
Refineries in Texas and Louisiana have stepped in with shipments of gasoline to Mexico after the country’s largest refinery halted operations mid-June after a flood and fire.
State-owned Pemex said last week that the 330,000 b/d facility in Salina Cruz should be operational by July 30.
Analysts are looking for US gasoline stocks to have declined 1.3 million barrels last week. Inventories fell 1.6 million barrels on average from 2012-16 during the same reporting period.
A larger-than-expected draw would be needed to further reduce the surplus to the five-year average, which has shrunk to 8.5 million barrels, the smallest it has been since the first week of January.
Source: PlattsPrevious Next