Energy Prospectus

Oil market will tighten sharply when U.S. refineries return from maintenance: Kemp - Reuters News
03-May-2019 14:15:32

By John Kemp
LONDON, May 3 (Reuters) - U.S. commercial crude oil inventories have been rising in recent weeks, which some observers have interpreted as evidence the global oil market is adequately supplied and blame for a sudden decline in oil prices.

But this narrative cannot explain the steep backwardation in futures prices for global grades such as Brent, which is usually associated with a market that is significantly under-supplied.

In fact, U.S. commercial inventories have been rising much less than normal for the time of year - even though refiners are undertaking heavy maintenance, which would otherwise have resulted in a larger stock build.

Refiners have been undertaking more maintenance than normal to avoid autumn and winter shutdowns in the run up to the introduction of new IMO marine fuel standards ("U.S. refiners planning major plant overhauls in second quarter", Reuters, April 19).

The limited increase in U.S. commercial crude stocks despite heavy spring maintenance tends to confirm that the global market has tightened significantly since the start of the year and will tighten even more in the second half. < This is what Raymond James basis their forecast of $90/bbl WTI by Q1 2020 on.

U.S. commercial crude stocks had increased by almost 30 million barrels by April 26 compared with the end of last year, according to the latest weekly data from the U.S. Energy Information Administration.

The stock build was much larger than the 12 million-barrel increase at the same point in 2018 but well below the 10-year average increase of 45 million barrels and otherwise the smallest seasonal build since 2011.

The United States produced an estimated 211 million barrels of domestic crude oil in the 17 weeks to April 26, which was more than offset by a reduction in net oil imports of 239 million barrels, according to the EIA.

However, U.S. refiners cut their crude consumption by almost 28 million barrels compared with 2018, which more than accounted for the faster rise in stocks compared with last year.

So far this year, U.S. refiners have processed an average of just 16.32 million barrels per day compared with 16.55 million at the same point in 2018, according to EIA data

Once refiners complete their maintenance and return to full production in preparation for the summer driving season, crude consumption is likely to surge, and stocks will draw down quickly.

Brent futures prices are trading in a backwardation of more than $2.70 per barrel between July and December as traders anticipate a big drawdown in global oil inventories during the second half of the year.

Hedge funds and other money managers have amassed a bullish position in Brent and WTI futures and options contracts equivalent to 723 million barrels by April 23, in the expectation prices will rise further.

Hedge fund long positions outnumbered short ones by a margin of almost 11:1, up from less than 2:1 at the start of the year, according to position reports published by the U.S. Commodity Futures Trading Commission.

Reduced U.S. net oil imports and the limited build up in stocks despite heavy refinery maintenance is consistent with other indicators that the global oil market is under-supplied.

The global market will become very tight later this year unless consumption growth slows or Saudi Arabia boosts output to offset production lost from Venezuela and Iran because of U.S. sanctions.

Read this: https://www.reuters.com/article/us-usa- ... SKCN1S743M

Few people seemed to notice that EIA was reporting weekly gains in U.S. oil production during the first quarter, but when actual results were reported for January and February they showed a decline in U.S. oil production. It is important to remember that all of the numbers that EIA publishes weekly are just estimates based on formulas.

From The Wall Street Journal
Saudi Arabia has pledged to boost oil output if needed, as the Trump administration starts banning all Iran oil exports on Thursday.

But behind the scenes, Riyadh and Washington face a potentially weekslong showdown over the number of extra barrels the kingdom would supply to global markets to keep crude prices stable.

The U.S. is pushing to restart production in a field shared by the kingdom and Kuwait that could unlock half a million barrels a day, people familiar with the matter said.

But at the same time, Saudi Arabia—in need of higher oil prices to keep its state budget balanced—is lobbying within the Organization of the Petroleum Exporting Countries to change the way the cartel calculates whether the market is adequately supplied as a way to show the U.S. that no more oil is needed, people familiar with the matter said.

The Trump administration on April 22 said it would end the exemptions it granted to Iran’s oil buyers, aiming to bring its exports to zero.

The move comes after oil prices posted their strongest first quarter in decades, rising about 30%. Oil prices hit a six-month high last week as the U.S. manages an embargo on Venezuelan oil shipments and a rebel general’s offensive in Libya risks jeopardizing that country’s production.

Saudi Arabia is set to debate with other producers how much extra oil it should pump at a technical meeting in its economic capital Jeddah on May 19. But by hosting the gathering, “they fear Trump will be fixated by the meeting,” a person familiar with the kingdom’s thinking said.

Seeking new oil sources to avoid tensions in the market, State Department officials have prodded Saudi Arabia and Kuwait to resolve a dispute with Saudi Arabia over the jointly held oil field in the so-called Partitioned Neutral Zone, an area that straddles onshore and offshore fields to the north of the Persian Gulf, as a way to boost global supplies.

Three years ago, the countries shut the field, citing disputes about land and environmental permits.

The return of production there would help ease oil prices, as it would add to existing production potential rather than drawing down on spare capacity.

The countries have struggled to reach an understanding, however. A summit in September between Saudi Crown Prince Mohammed Bin Salman and Kuwaiti ruler Sheikh Sabah Al Ahmad Al Sabah ended in bitterness, people familiar with the matter said.

At stake is whether Saudi Arabia will act on its late-April commitment to boost output when needed. In a tweet on Friday, President Trump said he “spoke to Saudi Arabia and others about increasing oil flow. All are in agreement.” Saudi Arabia is set to increase output, a person familiar with its policies said, but has made no promises specifying how much extra oil it could bring to markets and when.

Saudi Arabia’s production will remain below 10 million barrels a day until at least the end of May, Saudi Energy Minister Khalid al-Falih told Russian state news agency RIA Novosti last week.

Any decision on future production would depend on oil “stocks—whether they are above normal levels or below,” Mr. Falih told RIA Novosti.

Meanwhile, the Saudi energy minister is trying to change the measurement of those stock levels to justify maintaining most of OPEC’s current production curbs, people familiar with the matter said. Saudi representatives at OPEC have “returned to their antics on metrics to evaluate market balance,” one of these people said.

OPEC currently uses a five-year average of oil inventories in industrialized nations to determine if it needs to cut its production.

In November 2016, the cartel decided to reduce output by 1.2 million barrels a day after estimating inventories had surpassed their optimal level by 271 million barrels. The surplus has now shrunk to 7.5 million barrels—putting the market virtually in balance.

The Saudis are reluctant to boost production again as they seek higher prices. They need the revenue to cover domestic spending that includes a generous welfare state and a war in Yemen. After Washington said it would end exemptions on Iran’s oil exports, prices recently rose to $75 a barrel—nearing the $80 a barrel the kingdom’s economists say will cover most of its spending.

The need for higher prices prompted the kingdom to reignite an OPEC debate over the accuracy of its market measurements, according to OPEC officials said. The Saudis “have been desperately trying to play down or even discredit the five-year-average” metric, the officials said.

Last June, Mr. Falih, the Saudi energy minister, failed to persuade fellow members to shorten the average period of reference OPEC uses. This would have made it easier to justify production cuts as the new time frame would have included lower oil stocks. Now, as the Trump administration asks Saudi Arabia to replace Iranian oil, Mr. Falih is making another push to lower the bar on OPEC’s glut measurement.

Mr. Trump “may be disappointed if he wants to another surge of one million barrels a day,” said Helima Croft, chief commodities strategist at Canadian broker RBC Capital.
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MY TAKE: Saudi Arabia needs $80/bbl Brent to balance their fiscal budget. They have worked hard to get close to that number and they will NOT raise production just to make Trump look good. They did it when the original plan to take Iran to zero exports was announced in Q3 2018 and they ended up be tricked.
PS: Helima Croft knows a heck of a lot more about the global oil market than Trump or the U.S. State Department does.