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US crude stocks show counter-seasonal 1.16 million-barrel build

Brent likely capped in high $60s/b barring supply disruption: S&P Global Platts Analytics

New York — The oil complex settled sharply lower Wednesday as the market shed supply risk premiums amid toned down US rhetoric toward Iran and US crude and product builds.

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ICE March Brent settled $2.83 lower at $65.44/b and NYMEX February WTI was down $3.09 at $59.61/b.

US President Donald Trump appeared to soften his stance toward Tehran Wednesday, lessening the risk of an immediate US response to overnight Iranian missile strikes on US bases in Iraq.

"Iran appears to be standing down, which is a good thing for all parties concerned and a very good thing for the world," Trump said. "No American or Iraqi lives were lost because of the precautions that were taken."

Front-month March ICE Brent crude futures spiked more than $3/b to hit a high of $71.75/b when trading opened in Asia after Iran fired more than a dozen ballistic missiles at two Iraqi military bases housing US troops overnight Wednesday. But prices fell back as reports emerged of no casualties and it appeared the US would not immediately respond to the attacks.

"In the very short run this is profoundly bearish or crude," Confluence Investment Management chief market strategist Bill O'Grady said. "This is not a supportive time of the year and it looks like the dogs have been called off."

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Additional coverage: US-Iran tensions

Early January typically marks the nadir in seasonal US crude inventory changes, and stocks generally build later in the winter as stepped-up turnaround work blunts refinery demand. But US Energy Information Administration data released Wednesday showed an unexpected 1.16 million-barrel build in US crude supply last week, adding further downward pressure to oil prices.

NYMEX February ULSD settled 7.42 cents lower at $1.9582/gal and February RBOB was down 7.34 cents at $1.6488/gal at market close.

"Because there is no immediate supply disruption, some geopolitical risk priced into the market after the attack on those two bases came out right away," Tradition Energy analyst Gene McGillian said. "Now we have to wait and see if we have another escalation that does disrupt the supply and demand balance, but the market is signaling now that that is not in the cards."

FALLING US OIL IMPORTS

In the near term, Trump said the US would impose new economic sanctions on Iran in response to Tuesday's attack, but did not offer further details.

Trump downplayed the impact of the ongoing conflict with Iran on energy markets, saying that US growth in oil and natural gas output had eliminated the need for Middle East oil.

While US imports of foreign crude have fallen significantly, US refiners still imported more than 419,100 b/d of Saudi crude and over 252,200 b/d of Iraqi crude in October, according to the latest EIA data. Saudi and Iraqi imports accounted for nearly 11% of all US crude oil imports in October, according to the EIA.

S&P Global Platts Analytics expects Brent to be capped in the high $60s/b unless a supply disruption materializes, given Iran's aversion to a direct conflict and seasonal market weakness in the coming months.

"The odds of a major outage are admittedly lower than they were a day ago, but Iranian regional actions typically depend on indirection and unpredictability," Platts Analytics' chief geopolitical adviser Paul Sheldon said.

"Therefore, uncertainty will persist, and a bullish surprise remains a distinct possibility. Actions targeting oil production and transit, from either Iran or its proxies, would be unsurprising in the weeks and months ahead."

OIL SUPPLY RISKS

Veteran crude watcher Gary Ross said the price response exposes a fundamentally weak oil market.

"Crude is oversupplied, products are weak and financials are very long," he said on Twitter.

The ICE March ULSD crack spread against Brent was trading around $16.96/b early Wednesday, down from $19.20/b December 26. The ICE March RBOB crack has fallen to $4.48/b from $7.26/b over the same period.

ClearView Energy Partners said the conflict presents very real risks to oil supply, despite the relatively muted market response.

"We would reiterate that events unfolding in the Middle East could put anywhere from hundreds of thousands to multiple millions of barrels per day at risk, and we do not think that risk has abated," managing director at ClearView Kevin Book said in a note.

Book said the attacks "put the US and Iran in explicit military conflict with one another, however episodically."

"It does not seem a stretch to suggest that further escalation by both parties could lead to a sustained conflict or even a regional war," he added.