We took a brief hiatus from our weekly series Open Insights to update our oil thesis. Here are our most recent thoughts. We’re now back to looking at the EIA’s Weekly Petroleum Status Report (“WPSR”) for the week of June 5, 2020.
EIA reported a crude build of 5.7M barrels for the week, but this excludes a build of 2.2M barrels in SPR stocks as the US government continues to lease space to store crude. Net, we’re looking at a 7.9M barrel build for the week. Imports increased from the prior week, and Saudi tankers unloading continues to fill US onshore storage. It’s averaged about 1.5M bpd for the past 3 weeks, and we should see that amount continue for at least another 3 weeks.
Gasoline inventories increased by 900K barrels and distillates increased by 1.6M barrels, down from last week’s build of 9.9M barrels. Overall products increased by 4M barrels with the Big 3 (gasoline, diesel, and jet fuel) accounting for about 40% of the total.
Overall total liquids increased by 9.7M, or about 6M above the normal 5-year average.
A few things to note about US crude inventories in the past 4 weeks. The current crude supply/demand situation is a fairly balanced one. While crude inventories have increased by ~21M in the past 4 weeks, it’s important to remember that the Saudis have also discharged ~21M barrels into the US as the ships chartered by Aramco amidst the price war earlier this year has begun unloading. This was an inventory transfer as the Saudis didn’t increase production materially, but instead shipped existing stocks on hand to the US to suppress prices. So, despite the builds, the market is looking past the “large” headline numbers. In the coming weeks, we should see the remaining tankers unload, and thereafter, imports should fall considerably and trend back to recent norms, in which case, rising refinery utilization (via product demand recovery), coupled with increasing decline rates, should bring about crude draws.
Products, though, are somewhat of a concern. In the past 8 weeks, we’ve built ~63M barrels of products, two-thirds of which are Big 3 products (jet, diesel and gasoline). In the past 4 weeks, we’ve accumulated 38M of the 63M barrels (also about two-thirds Big 3), which indicates that the build pace is increasing. Products supplied, however, trended much higher this week, so we’ll see if this is the beginning of a trend or it’s a one-off. For now, though, it appears that domestic demand needs to increase by an additional ~1M bpd to sop up the excess and export demand also needs to recover.
Globally, for the week, we saw an increase of ~15M barrels, almost all of which occurred in US and Europe. With the Saudis increasing their official selling prices (OSPs) for its barrels, refiners will likely first draw down stocks as margins compress. All of which should help whittle lower existing inventories. This, coupled with the material decline in tanker shipments (post-price war), we expect to see June crude inventories fall sharply. As for products? TBD.
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