Declines in U.S. crude oil stocks each of the last two weeks because of record-high exports has failed to lift oil futures, with prompt-month NYMEX crude retreating to the $40-per-barrel area, unwinding part of September's rally, 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 show a drawdown of 400,000 barrels
* Gasoline stocks expected to fall 1.4 million barrels
* Distillate stocks expected to drop 1.64 million barrels
* Refinery utilization expected to decline 0.4 percentage points
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)
Inventories have dropped by more than 7.8 million barrels over the two weeks ending September 29. That compares with an average build of 2.18 million barrels from 2012-16 during the same period.
Counter-seasonal draws like these are expected to have persisted last week. Analysts surveyed Monday by S&P Global Platts expect inventory data Thursday to show U.S. crude oil stocks fell 400,000 barrels last week. That's counter to the average increase of nearly 6 million barrels for this reporting week between 2012-16.
This divergence away from seasonal norms was initially driven by Hurricane Harvey, which made landfall on the U.S. Gulf Coast (USGC) in late August. But the storm has had a lasting influence on trade flows and refinery operations.
Crude exports offer the most telling example. After initially dipping with Gulf Coast export ports shuttered, the amount of crude shipped overseas has since exploded, setting marks for all-time highs in consecutive weeks.
Exports averaged 1.491 million b/d the week ending September 22 and 1.984 million b/d the next week, Energy Information Administration data shows.
PIRA Energy, an analytics unit of S&P Global Platts, forecasts that U.S. exports eased last week, but still averaged 1.646 million barrels per day (b/d).
This massive outflow of U.S. crude isn't surprising in light of the shifting economics that has provided a strong incentive for exports.
The ICE Brent/West Texas Intermediate (WTI) price spread blew out in September reaching nearly $7/b at the end of the month, its widest level since August 2015 a few months before the legal restrictions were lifted on exports.
That spread has fallen to $5/b-$6/b since the start of October, but remains well above the $3/b level that had represented the upper end of the range since January 2016.
The forces of arbitrage should eventually cause the Brent/WTI spread to narrow further, but until then exports will likely remain elevated based on U.S. crude's competitiveness with rival grades.
In Northwest Europe, WTI is at a discount to North Sea crudes Forties and Ekofisk, according to S&P Global Platts' delivered-costs calculations. WTI also a commands a discount in the Mediterranean against Azeri Light and Nigeria's Bonny Light crude.
WTI's affordability extends beyond Europe. The delivered costs of WTI are at a growing discount in Asia to Russian's Sokol and ESPO, Vietnam's Bach Ho and Malaysia's Kikeh crude, according to S&P Global Platts' calculations.
In addition, the front-month Dubai crude swap reached its largest premium to the same-month WTI swap last week since August 2015. Dubai crude is the benchmark for Middle East supply to Asia.
Given the price appeal, a notable shift has occurred in India where Reliance Industries was heard last week to have made its first purchase of U.S. crude oil snapping up 2 million barrels for delivery in November.
Another first-time buyer of late was Bharat Oman Refiners Ltd, while state-owned Indian Oil Corp. just received its first shipment of 3.9 million barrels ordered since July.
GULF COAST PRODUCTION SHUT-IN
Exports provide an outlet for climbing U.S. crude production. Output averaged 9.561 million b/d the week ending September 29, the most since July 2015, according to EIA estimates.
Over the next two weeks, EIA estimates could be skewed by temporary disruptions in the Gulf of Mexico after operators evacuated personnel as a precaution ahead of Tropical Storm Nate.
On Thursday, the Bureau of Safety and Environmental Enforcement estimated that 254,607 b/d of Gulf of Mexico had been shut-in, a figure that rose to 1.243 million b/d Friday and 1.620 million b/d Sunday.
Without signs of major damage, it's likely that production will come back online quickly, while Gulf Coast refiners seem to have emerged unscathed compared with the devastation inflicted by Harvey.
At least one refiner, Phillips 66's 247,000 b/d Alliance refinery in Belle Chasse, Louisiana closed as a precaution, and has begun to restart.
Total refinery utilization was expected to have declined 0.4 percentage points last week to 87.7% of capacity.
If confirmed, that would mark the second straight decline after utilization reached 88.6% of capacity, driven by the recovery of Gulf Coast refiners post-Harvey.
Since bottoming at 60.7% the first week of September, USGC refinery utilization has risen, averaging 85.6% the week ending September 29.
GASOLINE STOCKS EXPECTED TO DROP
The return of USGC refinery activity has been felt in gasoline stocks, with total inventories rising by 2.75 million barrels to 218.936 million barrels over the two weeks ending September 29.
Despite these builds, the surplus to the five-year average has remained 1%-2% for four straight weeks, the lowest it has been so far this year.
With an eye on an expected drop in refinery utilization, analysts are looking for gasoline stocks to have fallen 1.4 million barrels last week.
That would nearly match the five-year average, which shows inventories falling 1.78 million barrels for the same reporting period.
Another figure to watch will be U.S. Atlantic Coast (USAC) gasoline stocks, which have risen by total of 3.48 million barrels the last two weeks.
Higher imports have helped pushed stocks higher. USAC gasoline imports have averaged 706,000 b/d the last two weeks, compared with 538,000 b/d year-to-date prior to that.
A surge in imports was expected after NYMEX RBOB futures shot higher post-Harvey when the Colonial Pipeline was forced to reduce flows because of a lack of Gulf Coast supply.
Most imports come from Europe, which has helped drain stocks in the Amsterdam-Rotterdam-Antwerp hub to 788,000 metric tons (mt) as of October 4, the lowest level so far this year, according to data from PJK International.
DISTILLATES STOCKS TIGHTENING
Harvey's impact on trade flows has also been felt with respect to distillates, as the reduction in diesel exports from the Gulf Coast to Europe opened fresh arbitrage opportunities.
Refiners in Asia and the Middle East exported more distillates to Europe to make up for the shortfall, which in turn has lowered stocks in storage hubs, like Singapore and Fujairah.
With supply diverted to Asia, ultra-low sulfur diesel (ULSD) prices in Asia have strengthened, as evidenced by FOB Straits 10 ppm sulfur gasoil, which last week reached its biggest premium to 500 ppm sulfur gasoil in almost 20 months.
Gulf Coast stocks of low and ultra low sulfur diesel have been stable the last three weeks at 38-39 million barrels, but that was still down nearly 5 million barrels compared with levels on September 1.
Another factor lending support to the diesel market is planned maintenance at Europe's largest refinery, Shell's 404,000 b/d facility near Rotterdam scheduled to start later this month.
This comes as diesel demand picks up from the agricultural sector because of the harvest. Chicago ULSD differentials strengthened last week to their fourth-highest level this year, and highest outside of the post-Harvey period.
Midwest combined stocks equaled 29.51 million barrels the week ending September 29, the fewest since December, according to EIA data.
Analysts expect distillate stocks fell 1.64 million barrels last week. The five-year average shows a decline of 2.6 million barrels for the same reporting period.
* Reformulated blend stock for oxygenate blending (RBOB) futures contract, the biggest premium to the front-month contract since late August.
* Implied demand is the amount of product that moves through the U.S. distribution system, not actual end consumption.
* Contango* is the industry vernacular for the condition whereby prices for nearby delivery are lower than prices for future-month delivery.