By S&P Global Platts Oil Futures Editor Geoffrey Craig
While last week's oil rally prior to US-led airstrikes in Syria illustrate the market's sensitivity to potential supply disruptions, the failure for market ‘volatility’ numbers to spike reveals comfort provided by booming US production, according to an S&P Global Platts preview 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 oil stocks expected to rise 625,000 barrels
- Gasoline stocks expected to decline 1.9 million barrels
- Distillate stocks expected to fall 1.6 million barrels
- Refinery utilization expected to increase 0.1 percentage point
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)
ICE Brent saw its biggest weekly increase of 2018, climbing a cumulative $5.47/b over the week to $72.58/b Friday. And while this was the strongest prompt Brent has been since late-2014, indicators of crude volatility remained relatively low.
The loss of Middle East supply at a time of tightening global crude stocks has been a catalyst for higher oil prices. But another significant observation has been the ability for volatility to remain modest, revealing some calm beneath the surface.
This paradigm -- higher flat prices, relatively low volatility -- suggests traders are incorporating supply risk without panicking.
The fluid situation in Syria involving outside powers, and possible unraveling of the 2015 Iran nuclear agreement, have sparked talk of geopolitical risk premium for the first time in years.
One reason why has been the backdrop of tightening of stocks both in the US and globally. US crude stocks stood at 428.64 million barrels the week ending April 6, a deficit of 2.6% to the five-year average, compared with a surplus of 9.3% at the end of 2017 and 32.1% a year ago.
Analysts surveyed Monday by S&P Global Platts expect crude stocks rose 625,000 barrels last week. The five-year average for this time of year shows a build of 3 million barrels.
The monthly oil market report released last week by the International Energy Agency contributed to the sense that the tightening of crude inventories wasn't just a US phenomenon.
OECD oil stocks fell by 25.6 million barrels to 2.84 billion barrels in February, the lowest level since April 2015, the IEA said.
Moreover, OECD inventories now sit just 30 million barrels above the five-year average. That surplus could be erased soon, achieving an objective OPEC identified when the group agreed to a coordinated output cut.
Realized, implied volatility
The limited scope of the US airstrikes in Syria over the weekend was leading the oil complex lower Monday, though crude futures remain just below the three-year highs set last week.
At the same time, realized and implied volatility for NYMEX crude futures both remain modest by historical standards, suggesting the rally has been orderly and traders don't expect significantly more volatility ahead.
Realized volatility for the second-month contract has been around 25% since late March. That is higher than levels seen earlier this year, but still a far cry from 2015-16 when realized volatility averaged around 41%.
And back in 2011, when oil prices were climbing with the loss of Libyan production amid the Arab Spring, realized volatility averaged 30%.
Implied volatility (M2) has followed the same script. That figure has been around 23% since late March, versus 25% on average in 2017, roughly 39% in 2016 and 2017 and 38.8% in 2011.
Relieving Permian Bottleneck
The cushion provided by US production has been a major factor capping volatility --- and also limiting the upside for oil prices.
US crude output averaged 10.525 million b/d the week ending April 6, according to Energy Information Administration estimates. That represents a year-on-year increase of 1.29 million b/d, much of which has been shipped overseas to Europe and Asia.
US crude exports have averaged 1.5 million b/d year to date, double the amount from 2017 during the same period. Imports have averaged 7.8 million b/d so far this year, versus 8.1 million b/d in 2017.
A major challenge for oil companies has been building infrastructure fast enough to relieve any bottlenecks forming from the increase in production in the Permian Basin.
Those efforts have mostly focused on creating additional pipeline capacity needed to deliver barrels down to the Gulf Coast.
The Midland-to-Sealy pipeline, which connects the Permian with Houston, has come onstream with flows now above 500,000 b/d.
Other pipelines include the 275,000 b/d Longhorn pipeline, the 400,000 b/d BridgeTex pipeline and the 200,000 b/d Permian Express pipeline.
From the US Gulf Coast, crude barrels can be stored, exports or refined. The USGC refinery utilization rate was 94.1% of capacity the week ending April 6.
Total refinery utilization has increased six straight weeks. Analysts expect the utilization rate rose 0.1 percentage point last week to 93.6%, versus a rate of 92.9% a year ago.
Despite higher refinery utilization, analysts are looking for draws in gasoline and distillate stocks last week of 1.9 million barrels and 1.6 million barrels, respectively.
Global, Americas, Asia: Kathleen Tanzy, + 1 917 331 4607, firstname.lastname@example.org
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S&P Global Platts Media Contact update
Americas: Kathleen Tanzy, + 1 917 331 4607, email@example.com
EMEA and Asia: Alex Brog, +44 20 7176 7645, firstname.lastname@example.org and Arnaud Humblot, +44 20 7176 6685, email@example.com
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.
S&P Global Platts is a division of S&P Global (NYSE: SPGI), which provides essential intelligence for individuals, companies and governments to make decisions with confidence. For more information, visit https://www.spglobal.com/platts/en