S&P Global Platts Preview of U.S. EIA Data: Likely to Show Crude Stocks Rose 2.8 Million Barrels

By S&P Global Platts Oil Futures Editor Geoffrey Craig

NEW YORK - February 05, 2018

Consistent drawdowns in oil inventories at Cushing, Oklahoma over the last three months have led to a steepening backwardation in NYMEX crude, even as the broader rally across the oil complex has stalled, 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 rise 2.8 million barrels
  • Refinery utilization expected to decline 0.3 percentage points
  • Gasoline stocks expected to rise 200,000 barrels
  • Distillate stocks expected to fall 800,000 barrels

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)

Front-month NYMEX crude topped $66 per barrel (/b) in late January, marking a three-year high, but since then has backed off towards $64/b.

However, the term structure has kept strengthening. NYMEX crude oil futures’ price spread for nearby delivery was 38 cents/b Friday, the steepest backwardation since October 2014.

One factor helping explain this divergence is the continued decline in stocks at Cushing, Oklahoma, the delivery point for NYMEX crude oil futures contracts, while total U.S. inventories have begun building because of the seasonal decline in refinery demand.

Inventories at Cushing have fallen for six straight weeks and in 11 of the last 12 weeks. Cushing stocks total 37.02 million barrels, the fewest since January 2015, and down from more than 64 million barrels in early November.

Total U.S. crude stocks increased 6.78 million barrels in the week that ended January 26 to 418.36 million barrels, snapping a streak of 10 consecutive declines.

Analysts surveyed Monday by S&P Global Platts are looking for stocks to have increased last week by 2.8 million barrels. If the data matches that prediction, that would fall short of the 4 million-barrel average increase between 2013 and 2017.

Headwinds to oil prices include the start of seasonal builds, increasing U.S. production levels, and the dollar index halting its slide. There is prevalent view that so long as Cushing stocks keep falling, the tailwind behind NYMEX crude's term structure will likely remain intact.

One reason why barrels have been getting pulled out of storage is the expansion of pipeline capacity in late 2017 in the Permian Basin that means supply can bypass Cushing and go straight to the U.S. Gulf Coast (USGC). The startup in the fourth quarter of 2017 of the 190,000 b/d Diamond Pipeline from Cushing to Memphis has also been a factor.

In addition, the Keystone pipeline, which connects Alberta with Cushing, has been operating at reduced capacity since coming back online November 28 after shutting November 16 when a leak was discovered in South Dakota.

Some of the same issues have impacted not only NYMEX crude's term structure, but also price differentials in the physical market.

For example, Western Canadian Select at Hardisty, Alberta, fell to four-year low last week of the front-month NYMEX light sweet crude futures contract calendar month average (WTI CMA) minus $30.50/b.

Ongoing pipeline restrictions, as well as Suncor Energy's announcement that production had begun at its 194,000-barrels-per-day Fort Hills project, weakened WCS, which had already been under pressure since November.

There has also been less demand for Light Louisiana Sweet (LLS) crude moving north because of competing flows on the Diamond and Dakota Access pipelines.

The LLS differential to WTI cash stood at plus $5.05/b at the start of October, but since then has dropped. It was assessed Friday at plus $2.70/b.

Product stocks seen little changed

The onset of winter refinery maintenance has contributed to weakness in Gulf Coast crude grades. USGC refinery utilization fell 6 percentage points to 86.6% in the week that ended January 26.

Planned repairs will likely continue until next month. At Citgo's 425,000-b/d refinery in Lake Charles, Louisiana, multiple catalytic reformers are expected to be offline for the next four weeks.

In the Midwest, refinery utilization equaled 91.7% of capacity in the week that ended January 26. A downturn in Midwest utilization for maintenance is expected to reduce the size of the Cushing draws and eventually lead to builds.

Analysts are looking for overall U.S. refinery utilization to have fallen by 0.3 percentage points last week to 87.8%. The utilization rate a year prior equaled 87.7%.

Gasoline stocks were expected to have built last week by 200,000 barrels, compared with a 920,000-barrel average increase between 2013 and 2017 for the same period.

Distillate inventories likely fell 800,000 barrels last week. The five-year average shows a draw of 1.07 million barrels.

Brent/WTI spread under $4/b

The seasonal slowdown in refinery activity coupled with climbing US production will mean more barrels in storage, though one factor that could mitigate builds is exports.

Over the last four weeks, exports have averaged 1.36 million b/d, compared with 645,000 b/d a year earlier.

A relatively wide Brent/WTI spread since September -- topping $7/b as recently as December 26 -- has encouraged more exports.

However, the spread since then has narrowed sharply and was trading Monday below $4/b, lessening the incentive to ship crude abroad.

That said, the growing infrastructure to move barrels from the Permian to the Gulf Coast could ensure that exports remain solid.

For example, the Midland-to-Sealy pipeline, which opened in November, is on track to attain full capacity of 450,000 b/d early in the second quarter, the CEO of Enterprise Products Partners said last week.

And midstream operators have announced plans for an additional 2.7 million b/d of pipeline takeaway capacity from the Permian by 2020. Of that total, some 1.145 million b/d has already received shipper commitments.

For more information on crude oil, visit the S&P Global Platts website.

Global, Americas, Asia: Kathleen Tanzy, + 1 917 331 4607, kathleen.tanzy@spglobal.com.

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