What Really Caused The EIA Oil Draw?

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.

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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:

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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.

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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.

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By Matt Smith

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