RJ's take on Aug 7 EIA Petroleum Report
Posted: Wed Aug 07, 2019 5:26 pm
This week's petroleum inventories update was bearish relative to consensus. "Big Three" petroleum inventories (crude, gasoline, distillates – including SPR) increased by 8.4 MMBbls, versus consensus estimates calling for a draw of 3.5 MMBbls. Turning to crude, total inventories (including SPR) built by 2.4 MMBbls, versus consensus calling for a draw of 2.7 MMBbls and a normal seasonal draw of 2.5 MMBbls. Recall, a sizable portion of the crude builds in May and early June had been due to higher imports amid a narrower Brent-MEH spread. With the spread having widened back out, we think that crude draws will generally continue as summer driving season gets busier, though some week-to-week choppiness is still to be expected. Refinery utilization increased to 96.4% from 93.0% last week. Total petroleum product demand increased 0.9% after last week’s 1.3% decrease. On a four-week moving average basis, there is a 0.2% y/y increase in total demand.
Following a strong start to the year, oil prices pulled back in early summer, amid concerns about increased U.S. inventories and global oil demand, before regaining ground in late June and early July. However, prices again weakened over the past few weeks, amid the rising U.S. dollar and generally negative macro sentiment arising from the U.S.-China trade war. Fundamentally, we see a broadly supportive backdrop: the larger U.S. producers are exhibiting restraint in capital allocation; OPEC+Russia’s production cuts – in place through March 2020 – are noticeably contributing to inventory draws; U.S. sanctions against Iran continue to be impactful; and IMO 2020 is looming five months from now.
The 12-month futures strip ($52.93/Bbl for WTI and $57.79/Bbl for Brent) shows modest backwardation for both Brent and WTI; for comparison, our recently updated 2019 forecast is $62.50 WTI/$71.00 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 possibility of military escalation vis-à-vis Iran, and 2) on the bearish side, indications of global macro slowdown and resulting read-through for oil demand, following some mixed demand-related datapoints in recent months.
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When the EIA storage report differs from the API storage report it is (IMHO) EIA correcting a previous error. Hurricanes ("Barry") tend to throw off the EIA numbers more than usual. Last weeks crude oil storage draw did seem a bit too high to me.
Always remember that API and EIA numbers are nothing more than their best guess. Its is all that we have, so the traders over-react to it each week. This is especially true in a bear market, which is what is hanging over the commodities markets these days. Looking at the details of the report: EIA said refinery inputs increased by 800,000 barrels per day week over week and U.S. production was up an estimated 100,000 BOPD (very doubtful). Crude oil imports were up ~500,000 BOPD, so how did crude oil inventories go up? Weird?
Following a strong start to the year, oil prices pulled back in early summer, amid concerns about increased U.S. inventories and global oil demand, before regaining ground in late June and early July. However, prices again weakened over the past few weeks, amid the rising U.S. dollar and generally negative macro sentiment arising from the U.S.-China trade war. Fundamentally, we see a broadly supportive backdrop: the larger U.S. producers are exhibiting restraint in capital allocation; OPEC+Russia’s production cuts – in place through March 2020 – are noticeably contributing to inventory draws; U.S. sanctions against Iran continue to be impactful; and IMO 2020 is looming five months from now.
The 12-month futures strip ($52.93/Bbl for WTI and $57.79/Bbl for Brent) shows modest backwardation for both Brent and WTI; for comparison, our recently updated 2019 forecast is $62.50 WTI/$71.00 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 possibility of military escalation vis-à-vis Iran, and 2) on the bearish side, indications of global macro slowdown and resulting read-through for oil demand, following some mixed demand-related datapoints in recent months.
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When the EIA storage report differs from the API storage report it is (IMHO) EIA correcting a previous error. Hurricanes ("Barry") tend to throw off the EIA numbers more than usual. Last weeks crude oil storage draw did seem a bit too high to me.
Always remember that API and EIA numbers are nothing more than their best guess. Its is all that we have, so the traders over-react to it each week. This is especially true in a bear market, which is what is hanging over the commodities markets these days. Looking at the details of the report: EIA said refinery inputs increased by 800,000 barrels per day week over week and U.S. production was up an estimated 100,000 BOPD (very doubtful). Crude oil imports were up ~500,000 BOPD, so how did crude oil inventories go up? Weird?