By S&P Global Platts Oil Futures Editor Geoffrey Craig
The start of seasonal drawdowns in U.S. crude oil inventories could exert pressure on the ICE Brent/WTI spread, which has doubled since the start of March to more than $6/b Monday, 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 drop 1.1 million barrels
* Gasoline stocks expected to decline 500,000 barrels
* Distillate stocks expected to be unchanged
* Refinery utilization expected to decrease 0.2 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 widening has mostly been driven by Brent's strength reflecting global supply risks, while WTI's upside has been limited by the relentless climb in U.S. shale oil production.
The message implied by Brent's greater premium to WTI has been for U.S. producers to ship more crude overseas to offset OPEC's voluntary supply cuts and potential supply decreases elsewhere.
However, these dynamics could shift soon. The likely uptick in U.S. refinery activity as summer approaches will lead to increased domestic demand, which could see the ICE Brent/WTI spread to contract.
Analysts surveyed Monday by S&P Global Platts expect crude stocks fell 1.1 million barrels in the week that ended April 20. For the same week in the 2013-17 period, inventories rose 930,000 barrels on average.
Crude stocks typically fall from May until the end of August. But if stocks fell last week, that would mark the second straight draw, suggesting this period of seasonal declines could be underway.
A focus on U.S. fundamentals would represent a change after being overshadowed in the news cycle by the deterioration of the Venezuelan oil industry, the U.S.' military strike in Syria, Yemeni Houthi attacks on Saudi Arabia and uncertainty over the fate of the Iranian nuclear deal.
All of these storylines involve supply risk against a backdrop of OPEC's continued efforts to curb output as part of a coordinated production agreement.
Saudi Arabia's energy minister, Khalid al-Falih, showed no signs last week at a closely-watched meeting that he wanted to terminate the pact before its expiry at the end of 2018.
Recent efforts have focused on a long-term market management strategy beyond 2018 that would entail a continuation of production cuts.
Holding together an alliance could prove difficult, as seen Monday when Iranian oil minister Bijan Zanganeh questioned the need to extend supply cuts beyond the end of 2018 if oil prices continue to rise.
Crude term structures
That said, oil futures have yet to show any signs of traders unwinding positions betting on strength in ICE Brent relative to NYMEX crude.
The ICE Brent/WTI spread was trading Monday afternoon at $6.03/b, its widest level since early January, and out from $3.03/b on March 1.
The nearby term structures have also diverged. Both were backwardated by roughly the same amount in early March at about 20 cents/b.
But since then, ICE Brent's first-month/second-month backwardation has steepened, while the same spread for NYMEX crude has weakened, even flipping to a contango.
The rollover to June/July after the May contract's expiry on Friday has allowed NYMEX crude to return to backwardation, but a significant gap remains relative to ICE Brent.
As of Monday afternoon, NYMEX crude's June/July spread was backwardated 17 cents/b while ICE Brent's June/July spread was backwardated 69 cents/b.
One source of weakness for NYMEX crude was five straight weekly builds at the contract's delivery point in Cushing, Oklahoma.
But that streak was snapped in the week that ended April 13 after Cushing inventories declined 1.1 million barrels to 34.9 million barrels.
In addition, the overall crude inventory trend has arguably been bullish. Total stocks wiped out the surplus to the five-year average in March and now sit at a 3.5% deficit.
Higher prices at the pump
A major question facing the market is whether the deficit of crude stocks to the five-year average can continue to deepen this summer.
Strong refinery activity will help pull barrels from storage. After six straight weekly increases, the utilization rate decreased 1.1 percentage points to 92.4% of capacity in the week that ended April 13.
Analysts are looking for a further decline last week of 0.2 percentage points to 92.2%. A year ago, the rate stood at 94.1%.
The bigger issue moving forward is what impact, if any, might the higher oil prices have on demand?
U.S. retail gasoline prices are expected to be 14% higher this summer than last, with regular grade averaging $2.74/gal from April to September, according to the U.S. Energy Information Administration.
Stocks of gasoline on the Atlantic Coast stood at 60.254 million barrels, a 1.9% deficit to the five-year average, for the week that ended April 13.
Total inventories were 3.9% above the five-year average at 235.9 million barrels. Analysts are looking for a draw last week of 500,000 barrels, compared with an average build of nearly the same amount in the same period between 2013 and 2017.
For distillates, a colder-than-normal spring in the U.S. Northeast has been supportive for heating fuel demand, leading stocks to tighten.
Stocks of low and ultra-low sulfur diesel have dropped 9.2 million barrels over the last five weeks to 33.3 million barrels, a 2.6% deficit to the five-year average.
Analysts expect total distillate stocks to have been unchanged last week. Stocks increased by 316,000 barrels on average between 2013 and 2017.
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S&P Global Platts Media Contact update
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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