Weekly WTI Crude Oil Inventory Analysis: EIA release of 13th February

Summary of last weeks’ change in Crude Inventories figures:

API: -2.3 mb

EIA Consensus:  +2.2 mb

EIA actual: +0.56 mb

A rise in US crude stocks of 0.56 mb combined with an increase in domestic crude production was interpreted as a bearish sign for US crude, and WTI fell in todays’ trading. Brent however rebounded from initial losses on increased forecasts for global crude demand for the International Energy Agency.

The Breakdown

After two weeks of US domestic crude production remaining almost flat, a rise of 1% this week was the main focus of the report as daily production breached the previous highpoint in the upward trend that has been increasing almost uninterrupted since September , all in all production now stands at the highest point since December 1992, as shown below.

Further negative signs for crude came from a further drop in refinery utilisation and crude inputs, with the utilisation rate falling 0.4%pts to 83.8% and input falling by -121,000 b/d. Although refiner demand was weak, products supplied to wholesales saw considerable growth of 996,000 b/d, representing an increase of 5.5%. While there was a modest fall in gasoline supplied of 0.1%, distillates supplied saw an increase of 8.7% and “other oils”, representing a variety of industrial products and feedstocks , jumped 22.8%, although the series is particularly volatile.

Despite the modest drop in gasoline products supplied, the reduction in refinery utilisation led to a fall in gasoline stocks by 803,000 barrels/-0.2%.  As the graph below shows, stocks are traditionally high at this time of year but may now have plateaued. This would be a good sign for future refinery demand as gasoline producers try to maintain lower stocks in order to maintain a higher profit margin.

Crude imports carried on declining in a trend that we should continue to see as sweet crude imports are replaced with domestically produced grades, providing logistical capacity increases (look out for a post this weekend discussing this point further).  On this point, despite the overall increase in crude stocks, the regional breakdown showed crude at Cushing dropped 1.1 Mb to 50.2 MB, with the rise in stocks coming from the PADD 3, 4 & 5 regions (Cushing is in Padd 2), showing crude has indeed been flowing to key refinery regions.

How Markets Reacted

Despite markets being focused on Cushing inventories in the last few weeks, there has been some debate as to whether a fall in the glut at Cushing will enable more US crude to be processed or whether gluts will simply develop elsewhere. This thinking may have been behind the fact that despite inventories at Cushing decreasing, markets did not react positively because of the belief refiners will reduce the price they pay for crude due to the build-up of stocks in those areas. What’s more, with US production resuming its upward trend, increasing levels of refinery and pipeline capacity will be needed to process ever more crude.

Indeed, because of this perception, WTI fell by around $0.50 in the half hour following the release, and was unable to rebound throughout the day, instead declining further after the end of UK trading.

Brent meanwhile managed to rebound from its fall, making up losses experienced in the period following trading to end the day $0.13 up on the back of momentum developed from higher global demand forecasts from the IEA.

Next week’s release

Breakdowns from the EIA report are particularly volatile due to the nature of the industry, but trends can be seen particularly in US production as the chart above showed. With markets shifting focus from the Cushing tunnel-vision that characterised the last few weeks, next week’s focus will likely be on production numbers again, with analysts also looking to see how stocks in key refining regions develop, with higher stocks likely to prices for WTI fall regardless of developments elsewhere.