FxWirePro: Evaluation of EIA’s crude inventory reports and projections – US exports to cushion WTI-Brent RVs

This week’s report was bullish for crude, neutral for gasoline and bearish for distillate. Total commercial crude and product stocks declined 1.1 Mb to 1303.4 Mb, and over the past 9 weeks have drawn 48.8 Mb or 775 kb/d. Total oil product demand remained robust, up 694 kb/d YoY to 21.43 Mb/d. US refining margins rose last week along with refinery crude runs, ahead of Hurricane Harvey.

Next week’s stats are likely to tell a different story for crude as the majority of the Texas refiners along the Gulf Coast either completely shut down or are operating at reduced rates. Refiners started to bring units down ahead of the storm last Thursday, but these shut downs did not show up in last week’s stats. On the crude supply side, upstream operators in the Eagle Ford shale (south Texas) and the Gulf of Mexico have also curtailed crude production, which may show up in next week’s production numbers.

On the products side, refineries not running or operating at reduced rates will result in a drop in oil product production in PADD 3, which could pressure product inventories lower, but the Hurricane likely reduced product demand in the PADD 3 area along with disruptions in trade flow terminals (imports and exports). Bottom line, for the next couple of reporting weeks, stats could be lumpy due to the storms disruption on the Gulf Coast.

WTI has lost more value relative to Brent in recent weeks and at the time of writing is $4/bbl below Brent. In part this reflects the steepening Brent backwardation, but it also indicates dual inflexion points. First, lower WTI pricing is limiting the ability of US shale producers to hedge future production. Second, with the US rapidly approaching the limit of domestic crude processing by refineries, discounts are needed to boost the competitiveness of US crude exports abroad. Data for May demonstrates that the US exported 4.28 mmt of crude in May. We expect the next six months to see further increases in crude exports.

The current rally in Brent market structure has pushed the short Brent spread position (Nov-Dec) to a mark to market loss, but we expect these fundamentals to ease back by the end of the quarter.

Brent CFDs have slipped vigorously yesterday (tumbled from the peaks of 51.98 to 50.53 levels), but continue to outperform WTI. We retain the view that short-term positive fundamental supports will ease in the coming weeks, but wouldn’t be surprised if Brent backwardation increased in the short term.

More structural factors seem to be weighing on WTI’s relative value and we think it likely that in order to rebalance global crude markets it will continue. US crude will need to become increasingly competitive as the need to export crude increases. The need to export will likely be driven by US crude production reaching new record levels in coming months, but domestic processing capacity is effectively fully used.