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What Really Caused The EIA Oil Draw?

Oil Tanker

Crude prices are rebounding today, bouncing off the trampoline of price support at $48 for WTI and $50 for Brent. A surprise draw to U.S. crude inventories (not to some) has been behind the rally (see more below), while the monthly IEA report followed in OPEC's footsteps by showing higher Saudi production, and higher OECD petroleum inventories. All that said, hark, here are five things to consider in oil markets today:

1) Hot on the heels of yesterday's OPEC report, the IEA has released its respective monthly report today. In similar fashion to OPEC, the Paris-based agency has highlighted how OECD inventories have increased. After six consecutive months of dropping, stockpiles have rebounded by 48 million barrels in January, to back above 3 billion (beeelion) barrels.

As we pointed out yesterday, the goal of the OPEC production cut is to reduce OECD inventories back in line with the five-year average. As the two charts below illustrate, stockpiles of both oil and products have a fair old distance to travel before they normalize.

(Click to enlarge)

2) Our ClipperData show that U.S. crude imports from Saudi Arabia averaged 1.06mn bpd in 2015, and 1.1mn bpd last year. After averaging 1.28mn bpd for the first two months of the year - as a large wave of Saudi crude exported at the end of last year made its way to U.S. shores - volumes have dropped considerably so far this month (hark, below).

The OPEC kingpin has chosen to keep its export loadings strong into East Asia in the first couple of months, to the detriment of the U.S. That said, as Saudi loadings drop off towards East Asia in March, we are seeing a corresponding uptick in crude on the water bound for Uncle Sam.

3) We saw a counter-seasonal draw to crude inventories from today's weekly inventory report. This is, however, an anomaly caused by a drop in U.S. Gulf crude imports last week due to poor weather (as we said first thing on CNBC this morning).

Related: New Oil Price War Looms As The OPEC Deal Falls Short

Both gasoline and distillate inventories saw solid draws; the trend of stronger implied demand for distillates persists - causing a 4.2mn bbl draw to stocks when we generally see inventories holding steady. After holding at a seasonal record for the first six weeks of the year, a drop in profitability (aka crack spreads) has mired crude inputs for the last five weeks back in the five-year range:

(Click to enlarge)

4) After taking a swing at four dollardom in December - for the first time since late 2014 - natural gas prices have swooned, dropping by 25 percent. As the charts below illustrate, a colder-than-normal December has been swiftly followed by two mild months to start 2017, pressuring prices back below $3/MMbtu. Although a cold start to March has lifted prices once more, this is likely to be the last hurrah for winter (...we hope...) before we shuffle into the low-demand shoulder months.

Milder conditions of late have manifested themselves in a counter-seasonal weekly injection into storage in February (!!), and with storage levels nearly 20 percent above the five-year average, prices look set to remain in check.

(Click to enlarge)

5) Another factor which will help to keep a lid on natural gas prices is a return to rising production (after it dropped in 2016 for the first year in eleven). The EIA's drilling productivity report from Monday indicates that Permian natural gas production could reach 7.95 Bcf/d next month, up 15 percent year-on-year. Related: An OPEC Deal Extension Won’t Affect Oil Prices

As the chart below illustrates, rigs have climbed in the basin for nine consecutive months, while DUCs (drilled but uncompleted wells) have risen 43 percent over the same period.

(Click to enlarge)

By Matt Smith

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  • Kr55 on March 15 2017 said:
    Week to week imports are not the most important factor. It's the draw down of hidden off the books storage and floating storage. Complicated issue that no one really cares to tackle, but that is what creates issues in the market when doing through this kind of re-balancing. People are taken by surprise by storage flooding in that wasn't accounted for before, old oil that is moving from one place to another, but only just counted for the first time in report.

    Same thing happened back in the late 90's. Everyone complained that the IEA was sandbagging their reports and there were hidden barrels, but in the end, those hidden barrels did come to light and put some weight on the recovery.

    Same thing happened last summer as well. People were expecting drawdowns, and the contangos narrowed, then there was shock at inventories not drawing as all those hidden and floating barrels got dumped into on land storage.

    The nice thing this time around though, is we may be getting to the end of that extra storage, and it's right in time for refinery runs to increase and demand to jump up. Unlike last year when the storage took until the end of summer and the start of refinery maintenance to run out, then the storage just filled right back up in the fall to be dumped back into the market at the start of this year.
  • Oil trader on March 16 2017 said:
    Everyone is paying attention to USA, while number of oil rigs worldwide is decreasing, and demand, especially in the East will keep rising. You think that USA shale will step in and fill that gap alone? Won't happen.

    The summer is coming. There have to be further draws in inventories. And what will happen after that, we'll see...
  • EH on March 16 2017 said:
    Kr55, you are right about hidden supply,, and it is just that,, HIDDEN. Awaiting price soaring. They are building new 188'000 bl tanks on the oil farm here in Midland adding too the filled ones out there now. Look, it costs money having barges sit FULL out at sea. Ya gotta feed and pay the crew while waiting for a place to DUMP THE STUFF. Big OIL is in between a rock and a hard place,,, the World is AWASH in oil and from comparing the past 45yrs to today,, with all the shell and the pea games, these guy's have played on us consumers, we're MOVING AWAY from the dependence on there product as much andd as fast as we can,,end of story

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