NEW YORK (January 29, 2018) – Persistent declines in U.S. crude oil inventories have eased oversupply concerns, shifting focus in the market toward the bullish impact that a weaker dollar is having on global oil demand, 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 stocks expected to rise 325,000 barrels
* Refinery utilization expected to decline 1.3 percentage points
* Gasoline stocks expected to rise 1.05 million barrels
* Distillate stocks expected to fall 1.5 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)
The inverse relationship between oil and the dollar had frayed recently, but that's no longer the case, with dollar weakness seen as a key driver behind crude's rise above $65/b, a three-year high.
Analysts surveyed Monday by S&P Global Platts were split on the direction of stocks last week, with the average estimate a build of 325,000 barrels.
If confirmed, that would snap the streak of consecutive declines, but fall short of the average 6.5-million-barrel increase seen for the same reporting period from 2013-17. It is typical for inventories to rise this time of year as refinery demand slows because of winter maintenance.
U.S. refinery utilization has fallen three straight weeks, and is expected to show another decline, down 1.3 percentage points, for the latest reporting week to 89.6%. That would be the first time below 90% since early November.
Distillates stocks are expected to drop 1.5 million barrels for the latest reporting week, roughly double the average draw from 2013-17.
Gasoline stocks likely increased last week by 1.05 million barrels. The five-year average shows a build of 2.1 million barrels.
Strong refinery activity -- as well as higher crude exports -- have offset the climb in U.S. production, allowing inventories to decline.
U.S. crude stocks have declined 10 straight weeks by 47.4 million barrels to 411.58 million barrels, the fewest since February 2015.
Compared with the five-year average, inventories now sit at a surplus of 3.9%, compared with 14.6% 10 weeks ago and 35% a year ago, according to Energy Information Administration data.
Dollar's heightened profile
A sense that the balance between supply and demand has tightened marks a significant shift in the oil market narrative that had been in place since 2014, dominated by the explosion in U.S. shale production.
Traders have recently become more sensitive to potential losses of supply from geopolitical risk, for instance, as well as fluctuations in the dollar. A weaker dollar makes commodities, including oil, less expensive for holders of other currencies, but that relationship isn't always robust.
That was the case for much of 2017, when the U.S. Dollar Index began the year above 103 points, its highest level since late 2002, but then began to decline, particularly over the summer. Despite that downward trajectory, it wasn't until this January that analysts began highlighting the dollar/oil relationship.
One possible explanation is that in the face of a tighter environment, traders are keeping closer track of every barrel; the implications of a weaker dollar on demand cannot be overlooked.
Also, the weaker dollar hasn't been tied to a weak US economy, but instead to the optimistic economic outlook across the world that has lifted other major currencies, like the Eurodollar and Japanese yen.
Synchronized growth has become the key buzzword causing major shifts across financial markets. That sentiment has driven oil, equities and yields on government bonds all higher, while pushing down the U.S. Dollar Index.
Brent/WTI spread narrowing
Another consequence of the reduction in surplus U.S. crude stocks has been the narrowing of the Brent/WTI spread, which was trading Monday afternoon at less than $4/b for the first time since August.
The Brent/WTI spread blew out in August, sending a signal to US producers to export more crude in order to reduce the glut at home.
As expected, U.S. exports took a step higher in mid-September, and have remained elevated. The Brent/WTI spread remained wide, topping $7/b as recently as December 26.
U.S. crude oil exports have averaged 1.28 million b/d over the four weeks ending January 19, compared with 679,000 b/d a year earlier.
U.S. crude oil exports averaged 1.555 million b/d last week, according to an estimate by S&P Global Platts Analytics based on data from cFlow, S&P Global Platts' trade-flow software.
Over the last month, the spread has closed steadily, and if this continues, it could return to the range between parity and $3/b that had been in place from late 2015 after U.S. export restrictions were lifted.
Steady declines in stocks at Cushing, Oklahoma -- delivery point for the NYMEX crude oil futures contract -- have also contributed to narrowing spread.
Inventories there have declined 10 of the last 11 weeks by 25.3 million barrels to 39.244 million barrels, the fewest since January 2015.