Growing OPEC Production Limits Market Gains
- Petroleum prices hit six-week high on inventory draws.
- OPEC overproduction news hits markets.
- OPEC Joint Ministerial Monitoring Committee meets on Monday to discuss compliance with production cuts.
- Natural gas injections to storage running slightly below normal so far this year.
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Inventory draws across the board pushed petroleum prices to a six-week high in last week’s trading. News of OPEC overproduction in July poured cold water on the rally, reversing petroleum markets on Friday. The price action underscores how tenuous the situation is for the bulls. While global demand has improved, it will take a more disciplined OPEC to draw down global inventories. Coincidentally, OPEC’s Joint Ministerial Monitoring Committee, which oversees compliance, met on Monday in St. Petersburg, Russia. While the committee can only make recommendations and not policy, the market will be looking for clues from the sidelines as Saudi Arabia and Russia signal their enthusiasm for the cuts going forward.
U.S. inventories of gasoline continued to decline, falling another 4.4 million barrels. Gasoline stocks are now 10 million barrels below last year’s levels. After a slow start to 2017, U.S. drivers have been making up for lost time. Gasoline demand was a respectable 9.6 million barrels per day. Continued strong demand and falling inventories has reduced days of supply back to the five-year average.
U.S. crude oil inventories fell by 4.4 million barrels for the week ending July 14, 2017. Since the beginning of April, U.S. crude oil inventories have declined by almost 45 million barrels. While it is not uncommon to see declines in inventories during this period when refineries rev up output, this year’s draw has been aided by a decision on exports by Saudi Arabia. Exports of crude from the Kingdom to the U.S. are at a seven-year low, and are expected to fall to levels not seen for several decades.
OPEC is unable to influence the drilling decisions of U.S. producers, so they have set their sights on reducing crude inventories. And what inventory is more transparent than here in the United States? But for this strategy to work, it will take a coordinated effort from all OPEC-non-OPEC countries that signed on to the production cuts in place until March 2018. News that the deal was on shaky ground hit the markets Friday in a report from Petro-Logistics, a company that tracks tanker movements to estimate OPEC supply. “OPEC-14 supply is expected to exceed 33 million barrels per day in July, which represents an increase of 145,000 bpd over June,” Daniel Gerber, Chief Executive of Petro-Logistics, said in an email. “July volumes represent an increase of more than 600,000 barrels per day over the first-half 2017 average.”
This week’s OPEC meeting is billed as routine, though speculation is that there will be discussions to bring currently-exempt Libya and Nigeria into the production cut. The committee may have no bite, but the traders will be paying attention to the bark.
Supply/Demand Balances
Supply/demand data in the United States for the week ending July 14, 2017, were released by the Energy Information Administration (EIA).
Total commercial stocks of petroleum decreased 10.2 million barrels during the week ending July 14, 2017.
Draws were reported in stocks of gasoline, K-jet fuel, distillates, residual fuel oil and other oils. Builds were reported in stocks of fuel ethanol and propane.
Commercial crude oil supplies in the United States decreased to 490.6 million barrels, a draw of 4.7 million barrels.
Crude oil supplies decreased in four of the five PAD Districts. PAD District 1 (East Coast) crude oil stocks fell 1.3 million barrels, PADD 2 (Midwest) crude oil stocks declined 2.6 million barrels, PAD District 3 (Gulf Coast) crude stocks retreated 0.8 million barrels and PADD 4 (Rockies) stocks decreased 0.2 million barrels. PAD District 5 (West Coast) stocks were unchanged from the previous report week.
Cushing, Oklahoma, inventories decreased 0.1 million barrels from the previous report week to 57.5 million barrels.
Domestic crude oil production increased 32,000 barrels daily to 9.429 million barrels per day.
Crude oil imports averaged 7.996 million barrels per day, a daily increase of 386,000 barrels. Exports fell 190,000 barrels daily to 728,000 barrels per day.
Refineries used 94.0% of capacity, a decrease of 0.5 percentage points from the previous report week.
Crude oil inputs to refineries decreased 125,000 barrels daily. There were 17.119 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, fell 103,000 barrels daily to 17.5 million barrels daily.
Total petroleum product inventories saw a decrease of 5.5 million barrels from the previous report week.
Gasoline stocks decreased 4.4 million barrels; total stocks are 231.2 million barrels.
Demand for gasoline fell 194,000 barrels per day to 9.592 million barrels daily.
Total product demand increased 1.221 million barrels daily to 21.178 million barrels per day.
Distillate fuel oil supply fell 2.1 million barrels to 151.4 million barrels. National distillate demand was reported at 4.334 million barrels per day during the report week. This was a weekly increase of 477,000 barrels daily.
Propane stocks rose 3.5 million barrels; total stocks are 65.7 million barrels. Current demand is estimated at 701,000 barrels per day, a decrease of 64,000 barrels daily from the previous report week.
Natural Gas
According to the EIA:
Working gas in storage was 2,973 Bcf as of Friday, July 14, 2017, according to EIA estimates. This represents a net increase of 28 Bcf from the previous week. Stocks were 299 Bcf less than last year at this time and 141 Bcf above the five-year average of 2,832 Bcf. At 2,973 Bcf, total working gas is within the five-year historical range.
Injections into storage have been slightly below normal this year. The EIA’s Short Term Energy Outlook (STEO) released this month reported inventories of natural gas are expected to be 3,940 Bcf at the end of October 2017, which would be 2% higher than the five-year average level for the end of October, but 2% lower than that of 2016. The EIA also predicts that “closer-to-normal winter temperatures are expected this winter following last year’s warm winter, which contributes to growth in residential and commercial consumption.”
Natural gas prices have been trading in a range from approximately $2.80 – $3.10. Expectations for a typical winter coupled with growing exports are a bullish combination. Dips to the lower end of the trading range are an opportunity to get long.
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