By S&P Global Platts Oil Futures Editor Geoffrey Craig
The relative strength of the Intercontinental Exchange’s (ICE) Brent crude oil contracts compared to the crude oil futures of the New York Mercantile Exchange (NYMEX) grew last week as concerns about geopolitical tensions appeared to eclipsed the bullish implications of the tightening of US crude inventories as the primary oil market driver, according to analysts surveyed by S&P Global Platts ahead of this week’s pending U.S. Energy Information Administration (EIA) oil stocks data.
Survey of Analysts Results:
(The below may be attributed to the S&P Global Platts survey of analysts)
- Crude stocks expected to rise 1 million barrels
- Gasoline stocks expected to drop 2 million barrels
- Distillate stocks expected to decline 1.9 million barrels
- Refinery utilization expected to fall 0.4 percentage points
S&P Global Platts Analysis:
(The below may be quoted in part or full, with attribution to S&P Global Platts Oil Futures Editor Geoffrey Craig)
Analysts surveyed Monday by S&P Global Platts are looking for a crude build of 1 million barrels for the week ended last Friday. This would compare to the average increase of 3.5 million barrels in 2013-17 for the same week.
However, the market has shown that it appears to be sensitive to the potential loss of Iranian exports if the U.S. exits the 2015-agreed nuclear deal, rather than the U.S. oil inventories situation.
The odds of a U.S. deal exit appeared upped last week when John R. Bolton, an outspoken critic of the Iran nuclear accord, was named U.S. President Donald Trump's new national security advisor, replacing Lt. General H.R. McMaster.
The ICE Brent/WTI spread broke above $4 per barrel (/b) last week after having been below that market almost nonstop since February. That spread was trading Monday at around $4.56/b.
Despite the recent widening, the ICE Brent/WTI spread remains tighter than the $5/b-$7/b range in place from September through late January. Still, one catalyst helping to squeeze the ICE Brent/West Texas Intermediate (WTI) price spread has been the steady erosion of U.S. surplus stocks since the autumn. In fact, the week ending March 16 marked a turning point as inventories dropped to a deficit of 1.1% to the five-year average. That figure a year earlier showed a surplus of 36% to the five-year average.
Lowering global crude stocks to the five-year average was a goal defined by OPEC producers when they agreed to restrain supply pursuant to an agreement that went into effect January 2017 and expires at the end of this year.
Saudi Arabia's Energy Minister, Khalid al-Falih, has spoken of extending supply cuts in 2019, raising the question of which metric can be used by OPEC to define success.
Heated rhetoric by Saudi Arabia's Crown Prince Mohammed bin Salman toward the Iranian regime has also contributed to the bullish environment for oil, as well as ICE Brent's relative strength.
CRUDE NEARBY STRUCTURE
That relative strength is also visible in term structure. ICE Brent's M1/M2 backwardation rose to 64 cents/b Friday, its steepest level since December 14, except for a one-day spike on expiry February 28.
NYMEX crude's May/June spread was backwardated 16 cents/b Monday afternoon. The M1/M2 has returned to backwardation after spending six straight days in contango heading into front-month expiry on March 20.
After having been at roughly equal levels of backwardation, NYMEX crude's one month to two month (M1/M2) price spread has proven to be clearly weaker than ICE Brent's M1/M2 spread across the last two weeks.
Another reason for this divergence has been the rebound in stocks at the NYMEX crude delivery point in Cushing, Oklahoma, the delivery point for NYMEX oil futures contracts. Cushing inventories have increased each of the last two periods by a total of 1.2 million barrels. Prior to that, Cushing stocks had declined 11 straight weeks and 16 of 17 weeks. The steady drawdowns had lowered Cushing stocks to 28.18 million barrels the week ending March 2, the fewest since December 2014.
UTILIZATION SEEN EASING
The market is also keeping close tabs on climbing U.S. crude oil production. Output averaged 10.407 million b/d the week ending March 16. That is a record-high according to EIA weekly data going back to 1983.
This additional supply must be absorbed by refiners at home and abroad or else the resulting build in inventories will weigh on oil prices.
U.S. refiners have been running at high capacity. The amount of crude processed over the last four weeks has averaged 16.24 million b/d, compared with 15.6 million b/d a year ago. Refinery utilization reached 91.7% of capacity the week ending March 16, its highest level in six weeks signaling facilities were returning to action following the winter maintenance period.
Analysts are looking for the utilization rate for the week ended last Friday to show a pull-back of 0.4 percentage points to 91.3% of capacity. A year ago, the utilization rate equaled 89.3% of capacity.
Strong refinery activity helps draw crude from storage, but also means demand for products must pace with supply.
This time of year typically marks the start of a period of persistent draws in gasoline stocks as seasonal demand picks up.
Gasoline stocks sat 4.1% above the five-year average at 243.065 million barrels the week ending March 16.
Analysts expect a drop in gasoline stocks for the week ended last Friday of 2 million barrels. If confirmed, that would fall short of the 3.4-million barrels decline seen on average from 2013-17.
Distillate stocks likely fell by 1.9 million barrels last week, analysts say, versus an average decline of roughly 1 million barrels from 2013-17.
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About S&P Global Platts
At S&P Global Platts, we provide the insights; you make better informed trading and business decisions with confidence. We're the leading independent provider of information and benchmark prices for the commodities and energy markets. Customers in over 150 countries look to our expertise in news, pricing and analytics to deliver greater transparency and efficiency to markets. S&P Global Platts coverage includes oil and gas, power, petrochemicals, metals, agriculture and shipping.
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