Raymond James take on IEA weekly petroleum report - May 15

[dan_s]

This week's petroleum inventories update was bearish relative to consensus. "Big Three" petroleum inventories (crude, gasoline, distillates - including SPR) increased by 2.6 MMBbls, versus consensus estimates calling for a draw of 1.0 MMBBls. As we have pointed out, now that OPEC supply cuts are showing up in the U.S., we expect normal seasonality to carry draws (notwithstanding week-to-week volatility). Turning to crude, total inventories (including SPR) increased by 3.7 MMBbls versus consensus calling for a build of 0.03 MMBbls and a normal seasonal draw of 0.6 MMBbls. Normal seasonality shows crude stocks building through April, before drawing as refiners exit maintenance and into the summer driving season. Refinery utilization increased to 90.5% from 88.9% last week. Total petroleum product demand fell 4.6% after last week’s 1.3% increase. On a four-week moving average basis, there is a 0.3% y/y increase in total demand.

Following the strong bounce year-to-date, the oil market is approaching last year’s highs. Fundamentally, we see a broadly supportive backdrop: the larger U.S. producers are exhibiting restraint in capital allocation; OPEC+Russia’s production cuts are noticeably contributing to inventory draws, with OPEC supply near four-year lows; U.S. sanctions against Iran are becoming more impactful; the picture for global demand growth is broadly upbeat; and IMO 2020 is looming eight months from now.

The 12-month futures strip ($59.52/Bbl for WTI and $65.82/Bbl for Brent) shows modest backwardation for both Brent and WTI; for comparison, our recently raised 2019 forecast is $66 WTI/$74.50 Brent, and the 2020 forecast is $92.50 WTI/$100 Brent.

Several wild cards remain in play, such as: 1) on the bullish side, the possibility of supply disruptions above and beyond the current ones, such as the fluid political situation in Venezuela and the possibility of military escalation vis-à-vis Iran; and 2) on the bearish side, the prospect of global macro slowdown (including risks from trade conflicts) and resulting impact on oil demand.

May 15, 2019