The Fuse

Are Recent U.S. Crude Draws the Result of a Normal Seasonal Decline or a Delayed Effect of OPEC’s cut?

by Matt Piotrowski | July 21, 2017

  • Since their peak in late March, US crude stocks have fallen by 45 million bbl
  • In 2014-16, from April through September, declines averaged 39 million bbl
  • Saudi exports to the U.S. plunge to 524,000 b/d
  • U.S refinery runs remain above 17 mbd
  • Refined product imports down 20 percent year-on-year (y-o-y)

Are recent crude stock draws in the U.S. the result of normal seasonal declines or a delayed effect of OPEC’s cuts?

The answer is some of both. A combination of factors has caused U.S. stockpiles to drop over the past several months, lifting WTI back toward $47 and Brent briefly above $50 before falling back.

It’s important to note that crude stocks typically decline during the summer period as demand picks up and refineries increase runs. So, what we’ve seen over the past few months is not out of the ordinary, which likely explains why the market has not put together a substantial rally. But it appears that some OPEC members restricting supply has begun to bite the U.S. market.

“It seems that the Saudi plan to make a visible dent in US stocks is working out for the time being.”

During the last three years, from April-September, crude stockpiles in the U.S. on average declined by about 39 million barrels. This year, since the end of Q1, they have already fallen by 45 million bbl and are projected to decline further. According to EIA’s forecast, crude stocks will decline by some 54 million bbl throughout Q2 and Q3, versus just 32 million bbl during the same time last year.

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This sharper-than-usual drawdown stems in part from high refinery runs, which are the result of strong demand and limited refined product imports, but also lower crude imports from OPEC countries, most notably Saudi Arabia. “It thus seems that the Saudi plan to make a visible dent in US stocks is working out for the time being, but the market remains rightfully focused on medium-term supply aspects where ongoing increases in US rig counts and production remain a fact,” said analysts at JBC Energy.

The Kingdom is particularly focused on cutting volumes to the U.S. since stocks here are the most timely and visible and draws have an outsized impact on prices.

The Kingdom has sliced exports to all regions, but it is particularly focused on cutting volumes to the U.S. since stocks here are the most timely and visible and draws have an outsized impact on prices. Last week, the Saudis, according to preliminary EIA data, sent just 524,000 barrels per day (b/d) of crude to the U.S., down by 327,000 b/d versus the previous week and roughly a third of import levels seen at the same time last year. Platts reported that the Louisiana Offshore Oil Port, which offloads tankers in the Gulf of Mexico, had received no imports of Saudi Arabian or Iraqi crudes through the middle of July, reflecting the tighter heavy/sour global market due to OPEC’s cut.

Refineries still running at a blistering pace

The stock draws can’t, however, be fully pinned on lower volumes from the Saudis. After all, stocks always fall during this time of the year amid higher demand. Refinery runs remain elevated above 17 million b/d, up by more than 400,000 b/d versus the same time in 2016. Although consumer demand was relatively lackluster during the first quarter of the year, it has picked up and is expected to average 20.3 mbd in Q3, a 370,000 b/d annual increase, helping draw down stocks.

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Despite higher consumer demand, refined product imports are lower, putting more pressure on domestic refiners.

Despite higher consumer demand, refined product imports are lower, putting more pressure on domestic refiners. According to preliminary EIA data, imports averaged 1.97 mbd over the past month or so, a 20 percent y-o-y reduction. Gasoline imports saw an acute drop, falling by 239,000 b/d, or 28 percent, leading to an 11 million bbl draw in gasoline stocks in the past five weeks.

Even with the big stock draws, crude inventories are still above year-ago levels and are expected to end Q3 higher than the same time in 2016. That’s why prices have yet to put together a big rally. Although gasoline demand may reach record levels through July and August, it will ebb in September and in Q4, easing the burden on refiners. At that time, crude stocks levels will likely stabilize.

The market has received a good bit of bullish news lately, but it’s too soon to conclude whether the tighter fundamentals are a seasonal blip or part of a structural rebalancing accelerated by OPEC production cuts.

 

 

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