Analysis: US crude stocks unexpectedly contract as production cuts accelerate

US crude inventories showed an unexpected draw-down last week amid accelerating production declines and strong exports, US Energy Information Administration data showed Wednesday.

Commercial crude stocks declined 750,000 barrels during the week ended May 8 to 531.48 million barrels, US Energy Information Administration data showed Wednesday. The draw-down snapped 15 consecutive weekly builds that has resulted in over 104 million barrels entering storage since mid-January.

Inventories at the NYMEX delivery hub of Cushing, Oklahoma, fell 3 million barrels to 62.44 million barrels. But stock builds on the US Atlantic Coast and West Coast, which respectively climbed by 1.19 million and 2.17 million barrels, pared the nationwide draw.

Analysts surveyed by S&P Global Platts on Monday expected a 4.8 million-barrel build. Notably, the surprise crude stock draw failed to meaningfully alter the US oversupply picture, as stockpiles remained about 11.4% above the five-year average, unchanged from the week prior.

Total US crude output averaged at 11.6 million b/d, the weakest since December 2018. Crude production is now down 1.5 million b/d from its mid-March peak of 13.1 million b/d.

Crude output declines have accelerated in May, with weekly output falling by 300,000 b/d last week, up from 200,000 b/d the week prior, and around 100,000 b/d for most of April. Output cuts are likely to extend in coming weeks as EIA's estimates catch up with real production levels. In the Lower 48 states, producers have announced around 1.7 million b/d of shut-ins as of Tuesday, according to S&P Global Platts Analytics.

US oil drilling operations continued to slow last week, portending future production declines. The number of active oil rigs was down 29 during the week ended May 6 at 286, and was down 404 from 838 on March 4, a 59% decline. However, a slowdown in rig count declines over the past two weeks could indicate that the acceleration in production declines could be short-lived. Last week's oil rig count decline was the smallest since mid-March.

US crude exports were steady last week at 3.53 million b/d, further weighing on nationwide inventories, and the four-week moving average of exports pushed to the strongest since early April at 3.32 million b/d.

REFINERY DEMAND FALLS AS MARGINS SHRINK

Total US net crude inputs dropped 590,000 b/d to 12.38 million b/d last week, the weakest since September 2008 and 25% behind the five-year average. Nationwide refinery utilization fell by 2.6 percentage points to 67.9% of total capacity. Utilization rates were lower in all regions outside of the Rockies, EIA data shows.

The coronavirus recovery is proving to be a bumpy one for refiners, who have been fairly disciplined in cutting back runs following the March demand plunge resulting from stay-at-home orders put in place to control the disease's spread.

US Gulf Coast refiners saw a falloff in margins for the week ended May 8, despite a lifting of regional coronavirus restrictions. WTI MEH cracking margins fell to $2.85/b, compared with the $4.32/b the week earlier, according to S&P Global Platts Analytics margin data.

Still, total product supplied, a proxy for demand, surged 1.46 million b/d to a six-week high 16.81 million b/d. Gasoline demand jumped 730,000 b/d to 7.40 million b/d and distillate demand was 690,000 b/d stronger on the week at 3.82 million b/d.

In contrast, jet fuel demand plunged by 160,000 b/d to 350,000 b/d - the lowest weekly figure on record dating back to February 1991. US jet fuel output established a fresh low for a third successive week, falling 4.1% to 443,000 b/d.

Total gasoline inventories drew for a third straight week, falling 3.51 million barrels lower to 252.89 million barrels. Stockpiles are now 8.5% behind the five year average, in from a surplus of 12.6% in mid-April.

Distillate inventories extended their counter seasonal build for a sixth week, climbing 3.51 million barrels to a three-year high 155 million barrels.