Thursday, October 5, 2017
As is frequently the case, the EIA weekly inventory report was the primary market mover yesterday. WTI crude stocks fell 6 million barrels, for reasons entirely different from the preceding week. Two weeks ago, the primary contributor to less crude supply was a one million barrel per day surge in refinery runs, as Gulf Coast refineries restarted after weeks of shutdowns due to Hurricane Harvey. Last week, refinery runs actually decreased slightly. However, crude imports declined versus prior week and crude exports increased dramatically.
Imports were affected by hurricanes off the East Coast that impaired shipping. Exports jumped to a record high of 1.98 million barrel per day. This increase was largely driven by a recent widening between prices for WTI and Brent futures. A wide price premium of Brent over WTI crude has boosted appetite for U.S. oil globally. The widening WTI/Brent spread is a by-product of Hurricane Harvey, which caused loss of a substantial amount of U.S. Gulf Coast refining capacity and the ability to export. Domestic crude inventories rose due to lower refinery activity, which led to lower WTI prices. European refineries ratcheted-up output and crude consumption to compensate for loss of U.S. refined product exports to Europe and South America. This elevated consumption drew down crude inventories, which led to higher Brent prices. With WTI and Brent prices moving in opposite directions, the spread increased. In that U.S. exports are now possible, excess domestic crude is being shipped to markets with tighter supplies and higher prices. This will eventually eliminate hurricane-related imbalances, with several more weeks of elevated U.S. exports in the interim.
Traders must have concurred with the foregoing analysis, in that a 6 million barrel crude drawdown did not lead to a higher WTI price. Perhaps the market was more focused on rising shale oil production (although little of that occurred last week), while Brent traders were concerned about pitiful Iraqi quota compliance and Libya recovering from their most recent giant oilfield shutdown linked to a militia attack. Heating oil stocks declined and the price rose. Gasoline inventory increased and price was inexplicably higher. Focusing on the stockpile big picture, WTI is at the high end of the five-year range, gasoline has lately bounced above the five-year average and distillates remain right on the five-year average. Last week’s heating oil stock drawdown was typical for this time of year.