Analysis: US crude stocks climb as rising production meets tepid refinery demand

New York — US commercial crude inventories rose during the week ended July 17 as production rebounded for the first time since the early days of the global COVID-19 pandemic, US Energy Information Administration data showed July 22.

Commercial crude inventories climbed 4.89 million barrels to 536.58 million barrels in the week ended July 17, putting stocks 19% above the five-year average -- the widest surplus since October 2017.

The bulk of the build was realized on the US Gulf Coast, where inventories climbed 4.85 million barrels to 305.97 million barrels.

Stockpiles at the NYMEX delivery hub of Cushing, Oklahoma, were up 1.38 million barrels on the week at 50.11 million barrels. The Cushing build was sufficient to offset draws elsewhere in the region and pushed total Midwest inventories 330,000 barrels higher last week.

Notably, stockpiles of crude held in the Strategic Petroleum Reserve were reported 2,000 barrels lower last week, marking the first time since late April that no new crude has flowed into the government-owned reserve.

US crude production climbed 100,000 b/d to 11.1 million b/d, marking the first increase in output since February, excluding the return of Gulf of Mexico production in mid-June, which was briefly taken offline by Tropical Storm Cristobal.

After more than four months of weekly decreases, the US oil and gas rig count rose by nine to a net 288 the week ending July 15, rig data provider Enverus said July 16.

While the uptick in rig counts and production signals a widely awaited trough for the upstream industry grappling with the coronavirus and its devastation of crude demand, near-term outlooks remain cloudy. US crude production is still down roughly 2 million b/d from its pre-pandemic peak in late February and WTI forward structure, while turning slightly more bullish in recent weeks, remains in a steep contango.

Second-month WTI settled at a 4 cent/b premium to the front-month contract on July 21, marking the first backwardation in that part of the curve since mid-May. However, the year-ahead contract settled in a $1/b contango to front-month, indicating forward demand still remains weak.

Refinery demand ebbs

Refinery net crude inputs slipped 100,000 b/d to 14.2 million b/d as total refinery utilization fell to 77.9% of capacity, down 0.2 percentage point from the week prior. The second consecutive weekly decline put inputs nearly 17% behind the five-year average, snapping a seven-week narrowing trend, which saw this deficit come in from 22.8% during the week ended May 22.

US Atlantic Coast refinery utilization plunged 13.4 percentage points to 36.6% of capacity, accounting for the bulk of the nationwide pullback in refinery demand. This decline was due in large part to an outage at Phillips 66's 258,500 b/d Bayway refinery in Linden, New Jersey, which was forced to shut unspecified units due to a power outage on July 9.

Weak refining margins continue to hold back a broader recovery in refinery demand. US refining margins fell last week as demand for gasoline and diesel remains questionable amid uncertainty regarding the possible impact of a new round of lockdowns to prevent the coronavirus spread.

The USGC cracking margin for WTI MEH five-day moving average fell to $4.61/b as of July 20, down from a July-to-date average of $5.18/b, S&P Global Platts Analytics data showed. On the Atlantic Coast, Bakken crude cracking margins averaged $4.99/b in the five days ended July 20, compared to a July-to-date average of $5.74/b.

Total product supplied for all refined products -- a proxy for demand -- eased 830,000 b/d last week to a three-week low 17.65 million b/d. Product supplied was lower for most major product categories: jet fuel demand fell 15% on the week, distillate was down 13%, and gasoline demand slipped 1%.

The pullback in distillate demand helped push stocks up 1.07 million barrels to 177.88 million barrels. Distillate inventories were last higher in December 1982.

But gasoline inventories fell 1.8 million barrels to 246.73 million barrels last week, putting stockpiles just 6.9% above the five-year average, in from as much as 12.6% in mid-April.