Oil Market Update

We have rarely in our 40+ years of analyzing the international petroleum market witnessed such a counterintuitive move in the oil market given the bearish weekly EIA stats relative to expectations. Of course, all markets were hyped over China-U.S. trade talk optimism, although thus far this morning some renewed caution is permeating both the oil market and S&P 500 futures. Nonetheless, it is worthwhile reviewing the EIA stats in more detail to try and determine whether yesterday’s jump in oil prices suggests an exhaustive short-covering final move for the time being, or whether the market is discounting future events. 

• Last week’s EIA-reported crude oil inventory draw of 1.7 million barrels came up short of consensus expectations, primarily through the combination of lower refinery runs, higher gross imports and lower gross exports, plain and simple. Stocks rose at Cushing last week, in contrast to private consultants’ estimates. The “adjustment factor” was actually a negative 155 MB/D, the first such negative number since the week ending August 31. As previously discussed, the hefty positives the EIA has reported since that time has “compensated” for the EIA’s underestimating actual domestic crude oil production on a weekly basis. We should not assume, however, that one negative value implies that production is now declining. 

• The recovery in gross imports is not unexpected, although the rebound was somewhat larger than our trade model had estimated. As also discussed, however, around the end of the year imports are usually quite volatile due to the timing of the landing and booking of cargoes due to tax considerations. Taking a look at the WPSR Table 8, Preliminary Crude imports by Country of Origin, we see that imports declined last week from Mexico, Ecuador, Nigeria and Kuwait. These declines were more than offset by increases from Canada, Venezuela, Colombia, Iraq, and Saudi Arabia. 

• In terms of the Kingdom, imports rebounded by some 335 MB/D to 1.007 MMB/D, the highest level since the week ending November 9. However, once again we believe year-end considerations impacted the volumes, since the previous week’s average of 672 MB/D was the lowest level since the week ending June 22. As such, averaging the last four weeks would still confirm our thesis that Saudi Arabia “pre-cut” its volumes before the December OPEC+ meeting in line with the publicly suggested reduction following the confab. In terms of gross exports, as we previously suggested the high volumes of exports and week-to-week volatility add an element of uncertainty to the guesstimation process. On a preliminary basis we will assume that gross exports rebounded during the current week. 

• In terms of crude oil runs, last week they retraced by 194 MB/D to 17.566 MMB/D. As discussed yesterday runs always decline in January from December, but the falloff started a bit earlier that we had estimated. The decline last week was relatively modest, but by month’s end, using history and our forecast refinery margins as a guide, they should be lower by about 1.0 MMB/D before falling further in February, hence accounting for the seasonal rebound in crude oil stocks. 

• Finally, a word about implied product demand. We previously discussed how the depressed levels of both gasoline and distillate implied demand for the week ending December 28 also reflected year-end tax considerations as secondary stocks were run down. We suggested that some rebound was likely for the week ending January 4, although we cautioned the recovery may be muted by the fact that the reporting period still included a few days of 2018. Last week implied gasoline demand did rebound, by a modest 112 MB/D. However, implied distillate demand declined further by some 248 MB/D to only 2.955 MMB/D. A look at history suggests that it can take a couple weeks for implied demand to normalize, and unless at year end the U.S. economy suddenly collapsed into recession, we will assume that implied demand finally rebounded during the current week.