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What’s Behind The Epic Draw In U.S. Crude Stocks?

Cushing

As a humongous draw to oil inventories has wrong-footed the market, crude prices have ripped higher in response. Hark, here are five things to consider in oil markets today:

1) Let's cut to the chase; that was a pretty epic weekly EIA inventory report. The 14.5 million barrel draw to crude inventories was the second-largest on record, and the largest since January 1999. The draw took many by surprise, although we reported to clients last Friday that we expected a draw of over 10 million barrels.

The draw was driven by tropical activity in the Gulf of Mexico, and specifically Hermine. Imports into the US Gulf dropped by a whopping 760,000 barrels per day on the prior week, while imports to PADDs 1, 3 and 5 dropped by a whoppingly whopping 1.87mn bpd.

In addition to the storms materially impacting imports, we also saw temporary shut-ins in the Gulf causing a drop of ~150,000 bpd in production. To add further bullish hues to this report, refinery runs increased to their highest level since August 2015 at 16.93mn bpd, while gasoline inventories drew down by 4.2 million barrels.

(Click to enlarge)

2) Before we revisit production freeze prognostications, let us check on the scores on the doors for OPEC oil exports for August...and they are once again at a new record. Funny that:

(Click to enlarge)

3) The potential variances involved with a production freeze are huge. If Iran, Nigeria, and Libya were exempt from any production freeze, then we could in theory still see another over 2 million barrels per day of production coming to market in spite of everyone else freezing.

Iran is targeting 4 million barrels per day, some ~400kbd higher than its current level, while Nigeria is ~450kbd adrift of its production level of 2mn bpd earlier in the year. Finally, under the (highly) unlikely scenario that Libya could increase production back to pre-civil war levels, another 900kbd could be coming to market also.

4) The sub-header below regarding producing more / supporting a freeze is one of 57 varieties of rhetoric we have been getting from the likes of Russia, Iraq, Iran et al. Related: Apache Announces Possible 3 Billion Barrel Crude Discovery In West Texas

Iraq is apparently willing to entertain a production freeze, but only after reaching a certain level of output, and one which is higher than where they are currently.

Comments from Falah Alamri, the head of Iraq's State Oil Marketing Co. (SOMO) endorse this notion, as he declares an expectation for steady growth in oil output and exports for next year.

5) The chart below helps to illustrate the point we make above regarding record OPEC exports; it underscores the change in stance by OPEC since that infamous meeting in November 2014 (h/t @ronbousso1). OPEC's oil market share has been ticking higher since, as Iran, Iraq and Saudi ramp up their crude exports. Increasing flows from Nigeria and Libya (should they happen) will only further improve this percentage:

By Matt Smith

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  • Kr55 on September 08 2016 said:
    Very intrigued by the refinery runs. The "Other Oils" production went up significantly, almost 1M per day, and there was only a 0.9M build, so the demand for other oils was pretty massive last week. I suppose that is part of the seasonality though.

    Also interesting was China imports showing some increase. May be that concerns about China demand weakening for various reasons, like being done filling reserves, was overblown.
  • Bob on September 08 2016 said:
    Maybe it's just a conspiracy theory but I'm wondering if these hugely variable weekly reports are just so computerized financial traders or those dominant big house commodity players can have plenty of volatility to profit from.

    For instance, I'm not sure why Hermine should've made that much difference. It didn't seem to get that close to the TX and LA major hubs and it only made hurricane and FL landfall very late in the week. It shouldn't have affected east coast much if at all for the reporting period. Yeah, there was some Gulf shut-in but not nearly as much lost as say the Canadian wildfires which didn't cause any astronomical draw.

    So while the storm might've had some influence, a 14.5 million barrel draw? Come on.

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