By S&P Global Platts Oil Futures Editor Geoffrey Craig
Tight pipeline capacity from the Permian Basin to the U.S. Gulf Coast has led to deep discounts for crude oil in Midland, Texas, at the same time that a rally has lifted NYMEX crude oil futures to three-year highs near $70 per barrel (/b), 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 1.8 million barrels
- Gasoline stocks expected to decline 1 million barrels
- Distillate stocks expected to fall 1.3 million barrels
- Refinery utilization expected to increase 0.3 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)
That means many U.S. producers have been unable to fully reap the upside of higher prices reflected in the futures market.
The NYMEX delivery point in Cushing, Oklahoma, sits less than 500 miles away from Midland, yet WTI Midland has trailed the futures contract by more than $5/b on average this month.
The same dynamic can be seen in the physical market. WTI Midland was assessed April 24 at WTI Cushing minus $8.35/b, the largest discount seen for that differential since August 2014.
The main driver behind WTI Midland's deepening discount has been the rise in Permian output leading to a bottleneck.
A portion of supply has been diverted to the storage hub of Cushing causing inventories there to rise six of the last seven weeks by a total of 7.1 million barrels to 35.3 million barrels.
By contrast, total U.S. inventories have been little changed over the last two months. In mid-March, stocks flipped from a surplus to deficit to the five-year average.
Analysts surveyed Monday by S&P Global Platts expect crude stocks rose 1.8 million barrels last week. For the same period, the five-year average shows inventories increased by 1.2 million barrels.
A big reason why stocks have managed to tighten, even though domestic output has climbed higher, has been the adjustment in flows.
Imports minus exports - or net imports -- averaged 6.3 million b/d year to date, versus 7.4 million b/d in 2017 over the same period.
A strong price incentive has encouraged US producers to ship more crude abroad since autumn. Exports shifted higher in September and have stayed elevated since then.
Brent's premium to the Houston crude market strengthened further in April, likely ensuring U.S. crude exports remain high for the foreseeable future.
The Brent/WTI crude at Magellan East Houston Terminal (MEH) price spread averaged $3.44/b during the last two weeks, versus $1.60/b year to date. That spread averaged 28 cents/b the same period in 2017. WTI MEH represents WTI Midland crude at the Magellan East Houston Terminal.
US EXPORTS COMPETING ABROAD
Oil companies are also investing in U.S. Gulf Coast infrastructure, laying the logistical groundwork for more exports.
There was speculation last week that Enterprise Product Partners might turn its Texas City oil terminal into an export facility after a VLCC was spotted approaching one of the two jetties.
A company spokesperson confirmed Monday that Enterprise was conducting tests to verify whether the Texas City dock can accommodate a VLCC for possible loadings.
Removing bottlenecks between the Permian and Gulf Coast could strengthen WTI Midland differentials, and push exports even higher.
The impact of potentially more U.S. crude exports on the global balance will depend on the amount of slack in the market at that time.
For now, the market is more focused on supply losses from Venezuela, the voluntary cuts by OPEC producers and Russia, as well as the possible unraveling of the 2015 Iran nuclear deal.
Oil futures have therefore been able to rally, even in the face of higher U.S. production, pushing ICE Brent to $75/b.
Yet the effects of more U.S. supply have been felt in the oil market, as the influx of crudes, like Eagle Ford, into Europe and Asia translates into competition with rival grades.
For example, one reason behind the recent weakening of differentials for Algeria's Saharan Blend and Kazakhstan's CPC Blend has been the increase in U.S. exports into the Mediterranean.
PRODUCT DRAWS LIKELY
Apart from more exports, the increase in refinery activity heading into summer should also help absorb barrels from rising domestic production.
After rising six straight weeks, refinery utilization dropped two straight weeks, falling to 90.8% the week ending April 20.
Analysts expect the utilization rate increased 0.3 percentage point last week to 91.1% of capacity. A year ago, the rate equaled 93.3%.
Despite the expected increase in utilization, analysts are looking for declines in gasoline and distillate inventories last week.
Gasoline stocks were expected to have drawn by 1 million barrels. The five-year average shows a build of 175,000 barrels.
Analysts were also looking for a draw of 1.3 million barrels in distillate stocks, versus an average build of 418,000 barrels from 2013-17.
Distillate stocks tightened sharply since early February. Stocks have dropped 18.6 million barrels over the last 10 weeks, moving from a surplus of 1% to deficit of 7.8% versus the five-year average.
U.S. Atlantic Coast stocks may have been impacted by last week's brief shutdown of Colonial Pipeline's distillate-only Line 2 for unplanned maintenance.
Combined stocks of low- and ultra-low sulfur diesel on the Atlantic Coast sit 8.4% below the five-year average at 32.143 million barrels.
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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.
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