Raymond James take on Oct 17 EIA oil report
Posted: Fri Oct 18, 2019 8:25 am
This week's petroleum inventories update was mixed relative to consensus. "Big Three" petroleum inventories (crude, gasoline, distillates – including SPR) rose by 1.6 MMBbls, versus consensus estimates calling for a draw of 1.0 MMBbls. Turning to crude, total inventories rose by 8.0 MMBbls, versus consensus calling for a build of 3.0 MMBbls and a normal seasonal build of 2.4 MMBbls – note the total number includes a 1.3 MMBBl draw in the SPR. Refinery utilization fell to 83.1% from 85.7% last week. Total petroleum product demand decreased 2.3% after last week’s 3.2% increase. On a four-week moving average basis, there is a 5.4% y/y increase in total demand.
Amid the U.S.-China trade war – where the latest headlines are mixed – oil prices are being weighed down by the intensely negative macro sentiment, with day-to-day choppiness dominated by demand-related fears. Last month’s stunning oil supply disruption in Saudi highlighted the vulnerability of supply to geopolitical risk, and yet current oil prices are actually lower than they had been before the attack. Even setting aside the Saudi situation, the fundamentally bullish supply side of the equation is largely being overlooked: the larger U.S. producers are exhibiting restraint in capital allocation and U.S. well productivity improvements are slowing down; OPEC plus 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 less than three months from now. The 12-month futures strip ($52.73/Bbl for WTI and $57.88/Bbl for Brent) shows modest backwardation for both Brent and WTI; for comparison, our recently reduced 2020 forecast is $70.00 WTI/$75.00 Brent. There remain several key question marks, such as: 1) on the bullish side, the possibility of supply disruptions above and beyond the current ones, most notably a potential scenario of military escalation vis-à-vis Iran, and 2) on the bearish side, visible indications of global macro slowdown and resulting read-through for oil demand.
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A member of RJ's Energy Sector Research Team will be our opening speaker at The Hess Club on November 13. Seating is limited, so register early if you wish it attend.
Amid the U.S.-China trade war – where the latest headlines are mixed – oil prices are being weighed down by the intensely negative macro sentiment, with day-to-day choppiness dominated by demand-related fears. Last month’s stunning oil supply disruption in Saudi highlighted the vulnerability of supply to geopolitical risk, and yet current oil prices are actually lower than they had been before the attack. Even setting aside the Saudi situation, the fundamentally bullish supply side of the equation is largely being overlooked: the larger U.S. producers are exhibiting restraint in capital allocation and U.S. well productivity improvements are slowing down; OPEC plus 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 less than three months from now. The 12-month futures strip ($52.73/Bbl for WTI and $57.88/Bbl for Brent) shows modest backwardation for both Brent and WTI; for comparison, our recently reduced 2020 forecast is $70.00 WTI/$75.00 Brent. There remain several key question marks, such as: 1) on the bullish side, the possibility of supply disruptions above and beyond the current ones, most notably a potential scenario of military escalation vis-à-vis Iran, and 2) on the bearish side, visible indications of global macro slowdown and resulting read-through for oil demand.
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A member of RJ's Energy Sector Research Team will be our opening speaker at The Hess Club on November 13. Seating is limited, so register early if you wish it attend.