Opinion

S&P Global Platts Preview of U.S. EIA Data: Likely to Show Crude Stocks Fell 1.6 Million Barrels


NEW YORK – A busy week on the economic calendar will test whether the risk-on rally that has upended global markets for equities, bonds, currencies -- along with commodities, including oil -- can stay alive, according to an S&P Global Platts preview of this week's pending U.S. Energy Information Administration (EIA) oil stocks data.


Survey of Analysts Results
:

(The below may be attributed to the S&P Global Platts survey of analysts)

* Crude oil stocks expected to fall 1.6 million barrels

* Refinery utilization expected to decline 1.3 percentage points

* Gasoline stocks expected to increase 2.1 million barrels

* Distillate stocks expected to fall 2.5 million barrels

 

S&P Global Platts Analysis:

(The below may be quoted in part or full, with attribution to S&P Global Platts Oil Futures Editor Geoffrey Craig)

Crude futures have risen to three-year highs, with ICE Brent flirting with $70/b, partly on the premise that widespread economic growth will translate into solid demand for oil products.

That is significant because perhaps the biggest question facing the oil market is whether demand will prove adequate to absorb likely further increases in U.S. production.

Output averaged 9.75 million b/d the week ending January 12, which was 39,000 b/d off the all-time high set four weeks earlier, according to Energy Information Administration estimates.

In addition, there is the issue of seasonal weakness that typically begins in January as refiners conduct winter maintenance.

Analysts surveyed Monday by S&P Global Platts expect refinery utilization fell 1.3 percentage points last week by 91.7% of capacity. If confirmed, that would represent the third straight decline after the utilization peaked at 96.7% the week ending December 29, which represented the highest level of 2017.

Analysts are also looking for gasoline stocks to have built by 2.1 million barrels, while distillates and crude stocks are expected to have drawn by 2.5 million barrels and 1.6 million barrels, respectively.

 

'Synchronized' growth new buzzword

 

Over the last year, U.S. crude stocks have dropped by 72.8 million barrels to 412.65 million barrels, slashing the surplus to the five-year average to 5.4%, down from 36.5%. Such raised suspicions that compliance with the OPEC-led supply cut agreement might erode as producers feel tempted by higher oil prices and the feeling that the goal of rebalancing the oil market has been accomplished.

Combined with an expected growth in U.S. crude oil production, the environment looks ripe for the bottom to fall out for oil prices. One thing that has prevented this from happening has been the jolt of bullishness in the global economy that has emerged as a major theme for 2018.

On Monday, the International Monetary Fund (IMF) said in its latest world economic outlook that the "cyclical upswing" underway since 2016 represents the "broadest synchronized global growth upsurge since 2010."

The IMF raised its estimate of global economic growth for 2018 and 2019 by 0.2 percentage points to 3.9% for both years. An improving global economic outlook has supported crude oil prices, the IMF said, along with other factors, including the weather in the U.S., an extension of OPEC-led supply cuts and Middle East political risk.

 

U.S. quarterly GDP figure

 

Greater confidence in the pace of economic recovery has spurred major central banks to begin unwinding quantitative easing programs, marking an end to loose monetary policy conditions.

The European Central Bank and Bank of Japan have both indicated a desire to cut back on stimulus measures.

Additional clues could be revealed this week when central bank officials meet Tuesday in Tokyo and Thursday in Frankfurt, Germany.

The prospect of higher interest rates in the Eurozone has strengthened the euro above $1.22, its highest level since December 2014.

The Federal Reserve has already embarked down this path, raising interest rates three times last year, and more hikes are expected this year. As expected, this has depressed prices for U.S. government bonds, pushing U.S. Treasury yields to multi-year highs. Solid U.S. economic data has reinforced the market's view that the Fed will keep raising rates. On Friday, the Bureau of Economic Analysis releases its estimate of U.S. GDP in the fourth quarter of 2017.

In addition, the recently passed tax bill has lifted hopes for corporate earnings, adding fodder to the rally in equities that has pushed the three major U.S. averages to record highs.

 

NAFTA talks set to begin

 

The sixth round of talks involving the North American Trade Agreement begins Tuesday in Montreal, as the fate of the 24-year old pact looks unclear given President Donald Trump's tough line on negotiations.

With trilateral trade at over $1 trillion annually, plenty is at stake in terms of the goods and services, including oil.

In November 2017, the American Petroleum Institute  (API) issued a joint position paper along with fellow trade associations in Mexico and Canada in support of NAFTA, which they noted has led to "increasingly integrated" oil and natural gas markets across North America.

Canada, for instance, is by far the biggest foreign supplier of crude to U.S. refiners. In 2017, U.S. imports of Canadian crude averaged 3.26 million b/d, according to EIA weekly estimates.

How closely intertwined the two markets have become can be illustrated by the price impact that problems with the Keystone pipeline have had both in Canada and the United States.

The Keystone pipeline, which connects Alberta with Cushing, Oklahoma, has been operating at reduced capacity since coming back online November 28 after shutting November 16 when a leak was discovered in South Dakota.

With supply backing up in Alberta, the differential for Western Canadian Select (WCS) has weakened sharply. WCS was assessed Friday $25.50/b below the calendar moving average for NYMEX crude. That discount equaled $14.25/b November 15, a day before Keystone was shut. Conversely, the reduced flows have helped drain barrels at the NYMEX crude delivery hub in Cushing, Oklahoma. Stocks there have fallen nine of the last ten weeks by 22.1 million barrels to 42.394 million barrels.

This has helped lift NYMEX crude futures, and strengthen its term structure, with the nearby spread backwardated since early January for the first time since late 2014.



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S&P Global PlattsUnited StatesUSEIAEnergy Information Administration EIACrude Stocks

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