Posted by Art Berman - The Petroleum Truth Report
20-Oct-2017
Erik Townsend welcomes Art Berman to MacroVoices. Erik and Art discuss: Comparative inventory levels on oil; Oil price responsive to inventories; Realization price recovery in crude prices takes time; Refinery intakes have not recovered; Where are average consumption levels; Outlook on gasoline & distillate stocks; Backwardation on WTI; Considerations on OPEC-NOPEC production cuts; Global market balance on oil.
Negative Correlation Between Comparative Inventory and WTI Price
Negative Correlation Between Comparative Inventory and WTI Price.
Mid-February CI ~213 mmb near April 2016 CI peak of 239 mmb.
139 mmb decrease in CI since by October.
Limited price response.
Previous price response based on sentiment.
Negative correlation after Feb 2017 still good just lower amplitude.
Comparative Inventory vs. WTI Price Yield Curve
Yield curve is not a mathematical regression because price excursions based on sentiment (both positive and negative) are not based on supply-demand fundamentals.
Mid-cycle price is where yield curve intersects y-axis (5-year average).
Limited price response in 2017 because of huge inventory overhang.
More curvature going forward means greater price response to falling CI.
Inventory Buildup Explains 2014 Oil-Price Collapse
Inventory build began in January 2014 but price collapse did not begin until June.
Low price and change from backwardation to contango in forward curves favored
storing rather than selling oil.
5-year average has risen over time as storage levels increased.
Current 74 mmb gap between inventory and 5-year average still near high of 99
mmb in 2011.
Refinery Intakes At Record Levels Before Hurricane Harvey
Record refinery intake levels > 17 mmb/day in 2017 fell because of hurricane disruption of refinery operations and pipelines.
These are recovering.
Production also fell but recovered only to fall again during recent Hurricane Nate.
Also temporary.
Net crude oil imports have fallen in 2017.
U.S. Consumption of Refined Products at Record High Levels in 2017
Demand for refined products has increased as economy improves and products are still relatively cheap.
Consumption reached record levels during summer of 2017.
Now declining seasonally.
Net Imports of Refined Products Declined ~ 500 kb/d in 2017
Greater product supplied resulted in a substantial decline of refined product net imports.
Average 2017 net imports were almost 500 kb/d less than in 2016.
That translates to almost 3.5 mmb/week.
A major factor in inventory and comparative inventory reduction.
Crude Oil Exports Increased 75% in 2017
Crude oil exports increased 364 kb/d in 2017.
That translates to 2.6 mmb/week, a substantial factor in inventory and comparative
inventory reductions.
Record export levels over last 3 weeks—1.9, 1.3 and 1.8 mmb/d.
Exports competing with OPEC in European and Asian markets.
Shale production was not a threat to OPEC before significant exports began.
Diesel is Major Growth Component for U.S. Refined Product Consumption and Exports
Diesel (distillate) comparative inventories have fallen through most of 2017.
Distillate CI currently negative.
Both distillate and gasoline CI declined during hurricane disruption of refineries to
meet demand.
WTI Forward Curve in Backwardation
Backwardation means that short-dated contracts (Nov 16-Apr 17) have a higher price than longer-dated contracts.
Reflects perception of tightening supply.
High volumes of producer hedging depressing contract prices 1-2 years in the
future.
Discourages storing oil more than 6 month contango portion of forward curve.
OPEC Production Cuts Only in Compliance With Agreements in March and April
OPEC-NOPEC production cuts exceeded 1.8 mmb/d in March and April.
Now, only about 1 mmb/d.
Reveals inability of OPEC to meet internal commitments.
Still, OPEC cuts have been a factor in inventory reductions.
OPEC Production Cuts Only in Compliance With Agreements in March and April
Brent premium to WTI price increased $5/barrel between early June and late September.
Partly because of Persian Gulf tensions between Qatar and GCC nations.
Also because of Kurdish Independence referendum.
These combine to create a “fear premium.”
Also, Cushing CI has been building since late July.
Contango portion of forward curve more favorable than current Gulf Coast prompt
arbitrage. A temporary situation.
Visit source site
artberman.com/art-macrovoices-comparative-inventor...
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