Welcome to the weekly oil storage report edition of Oil Markets Daily!
Note: We added a new section called “Trued Up U.S. Crude Production,” where we show the sum of adjustment + weekly crude production.
This week’s oil storage report was a great start to 2018. For those of you wondering why API’s and EIA’s data diverged so greatly, we noted to HFI Research subscribers last night that API’s 11 mil bbl draw was a catch-up. Here’s the latest API vs. EIA data:
Coming into this oil storage report, we said last week that we expected -6.22 million bbls; EIA reported -4.948 million bbls. The difference between our forecast and EIA’s can be explained by the lower reported U.S. crude exports.
Even though the crude storage draw was less than what we expected, it was still very bullish given that the five-year average is -1.412 million bbls. In addition, the Cushing balance continues to drop with a decline of 2.395 million bbls vs. the five-year average build of 790k bbls.
Gasoline and distillate storage saw builds, but came in below the five-year averages — as you can see above. Total liquid stockpile declined 5.524 million bbls vs. the five-year average build of 8.946 million bbls. Refinery throughput is starting to decrease as maintenance season starts. Refinery throughput came in at 17.323 million b/d, or a drop of 285k b/d.
U.S. crude production saw a drop of 290k b/d with Lower 48 production contributing all of it. We saw the weekly production figure coming in at 9.492 million b/d. But as readers will remember from our analysis of EIA 914, we believe U.S. crude production is sitting around 9.973 million b/d vs. the reported 9.492 million b/d. In addition, you can see the jump in adjustment of 155k b/d WoW to 481k b/d. We did see “trued up” U.S. crude production drop 135k b/d likely due to freeze-offs from the arctic blast last week.
Crude imports also dropped to start the year, falling 308k b/d WoW to come in at 7.658 million b/d. Our thesis for Q1 2018 is that U.S. crude imports will remain lower than last year by, on average, 600k b/d. This results in crude storage to draw in Q1 2018, so that was a good start. Crude exports, however, fell 460k b/d WoW to 1.015 million b/d. We expect crude exports to average 1.5 million b/d in Q1 2018 as weekly volatility will persist in these figures, with one week rebounding higher and one week showing lower exports.
Overall, what you should take away from this report is that the bullish U.S. crude storage draws we saw in 2017 won’t be going away anytime soon, even as U.S. crude production increases. This will result in a very bullish storage balance in Q1 2018, as we detailed here. As a result, oil prices will remain supported and move higher.
Next Week’s Forecast
For next week, we have a preliminary draw of 4.92 million bbls. As you can see, refinery throughput decreases again from 17.323 million b/d to 16.88 million b/d. This compares to the five-year average, which shows a build of 621k bbls.
This week’s storage report also accelerated the year-over-year comparison in crude storage, as you can see in the chart below:
And here’s our latest update on where we think U.S. crude storage will end Q1 2018:
We think the bullish Q1 2018 balance will keep propelling sentiment higher, resulting in energy stocks (XLE, OIH, XOP) continuing to outperform. Oil prices should be well supported at today’s level and move even higher.
Total Liquid Stockpile
We are also off to a good start in total liquid stockpile in the U.S. We saw storage decline 5.524 million bbls vs. the five-year average build of 8.946 million bbls.
The year-over-year comparison is now accelerating to the downside, and the five-year average is within reach in Q1 2018:
Seasonally, we usually see gasoline storage build in the first few weeks of the year. But as refinery throughput decreases, we will see gasoline storage start to decline. The build we saw this week was not out of the ordinary.
The same can be said of distillate storage. There was nothing out of the ordinary with this week’s reported build.
Cushing storage is now below the five-year average, as you can see represented by the red dot on the chart above. The five-year average is a bit skewed thanks to higher storage levels from the last three years, but you can see that the trend in storage change has been counter-seasonal.
With refinery throughput starting the year so high, the average across Q1 2018 will also be comparatively higher than the prior years. Our analysis of the outages coming over the next few months also show much lower maintenance than last year and the prior years. This will help provide the tailwind needed to keep drawing crude storage lower.
Another crucial input to our estimate of Q1 2018 storage is the assumption that crude imports will be lower than normal. As you can see in the green dotted line on the chart above, last year’s imports started off around ~9 million b/d as OPEC ramped exports into year-end 2016, and a combination of offshore storage offloading saw imports spike. We have none of those elements this year, so the year-over-year comparison for crude imports will be sharply lower.
This week saw crude exports fall week over-week, but the four-week rolling average shows U.S. crude exports averaging around 1.4 million b/d. We are expecting crude exports to average ~1.5 million b/d across Q1 2018 as the Brent-WTI spread remains wide.
U.S. Oil Production and Adjustment
In our assumptions for 2018 crude storage balance, we used a very aggressive growth figure and still came out with a record draw scenario. The odds are not in the oil bears’ favor. So even as U.S. shale crude production increases, we see no risks to our bullish storage forecast.
Q1 2018 is starting off on a positive note, with another very supportive oil storage report. All signs point to Q1 2018 showing a counter-seasonal and very bullish crude storage change, and we think most analysts and investors aren’t seeing this coming. In our view, this divergence in the storage forecast remains the No.1 piece of ammunition we possess in our sentiment and oil price forecast heading into the rest of 2018.
For next week, we are showing preliminary crude storage draws of 4.92 million bbls.
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Disclosure: I am/we are long OIH.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.