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Schachter’s Eye on Energy: Product inventory build in the EIA data drives crude prices lower

1024x256_goldblue Schachter Eye on Energy

Each week Josef Schachter will give you his insights into global events, price forecasts and the fundamentals of the energy sector. Josef offers a twice monthly Black Gold newsletter covering the general energy market and 32 energy and energy service companies with regular updates. He holds quarterly subscriber webinars and provides Action BUY and SELL Alerts for paid subscribers. Learn more and subscribe.

Crude oil continues to retreat as the de-escalation of tensions and the war fears between the US and Iran subside. Iran’s shooting down of the civilian Ukraine plane has ignited massive protests against the regime for allowing civilian flights during a military response. Iran is now turtling from media accessibility and has arrested those they hold responsible. The price of crude fell post the war fears peak at US$65.65/b and fell below US$60b last Thursday. 

EIA Data: Today the EIA report was supportive of a continuation of declining prices for the near term. The EIA was expecting a decline of inventories of 0.5Mb but the result was a decline of 2.5Mb as swings in inventory from net imports continued. Net imports fell 596Kb/d or 4.2Mb on the week so this is bearish. Imports fell 179Kb/d and exports rose 417Kb/d thus the move in US commercial stocks. US exports rose to 3.48Mb/d but are below the record level of 3.62Mb/d of a few weeks ago.

US product inventories rose and this is why we are seeing the most pressure on WTI. Gasoline inventories rose by 6.7Mb and Distillates by 8.2Mb. This rise in inventories at this time of year is disconcerting. Winter is normally a time of strong declines in inventories because of record winter usage. US consumption fell 309Kb/d to 19.0Mb/d another bearish stat. Watch for these builds to get more headlines in the coming days as it did last week.

Domestic supply rose by 100Kb/d to a new high of 13.0Mb/d despite the rig count falling last week by 15 rigs to 781 rigs (down 27% from the prior year) according to Baker Hughes. Of note the Permian lost 6 more rigs to 397 rigs and compares to 488 rigs (down 19%) working in early 2019. We do not see US production rising over 13.4Mb/d in 2020 versus the bulls forecasting over 14.0Mb/d. The cut in budgets, rig count and productivity of Tier 2 wells argues for the more sanguine view.

OPEC Monthly: The OPEC report out today supports Saudi Arabia’s move to lower inventories and tighten supplies up for higher prices in 2H/20. OPEC cut back production by 161Kb/d to 29.44Mb/d of which Saudi cuts were 111Kb/d of the total. Other notable cuts were from Iraq 76Kb/d and UAE 46Kb/d. With the 500Kb/d (400Kb/d just from Saudi Arabia) during Q1/20 when the call on OPEC would be 29.2Mb/d; OPEC, if holding to their quota’s will be producing only 28.9Mb/d and this should tighten inventories over the period. The issue becomes what happens in Q2/20 thereon. If OPEC holds production flat from Q2/20 onward then oil prices will improve once the strong summer driving season starts. If OPEC adds to production then the amount will be critical to see where inventories go. I suspect that Saudi leadership will want tight supplies to continue into year-end and see WTI move over US$70/b.

Conclusion: WTI today is down 69 cents to US$57.54/b and is heading to our near term target of US$54-56/b as the EIA data was bearish for prices. Energy and energy service stocks are retreating with the oil price decline and we await a low risk buying opportunity to add to positions. Fourth quarter results for the sector will be coming out in a few weeks and with the focus on debt repayment may show many companies with flat or declining production profiles which should drive their stock prices lower. Get your buy list ready!

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