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Crude Oil Down as Inventory Decline Falls Short of Expectations

Sean Coakley February 28, 2018

Total crude and refined product inventories in the US declined again in the week ending November 5, bringing their streak of declines to 21 weeks, but the drop was smaller than expected and both West Texas and Brent benchmark crude prices slumped after the release.

The Energy Information Administration reported for total inventories fell by 4.43 million barrels, missing market expectations for a 5.46-million-barrel draw down.

Actual Vs. Expected Storage Numbers
Crude:               2.24 mmbbl        vs.       -2.21 mmbbl
Gasoline:          -3.31 mmbbl       vs.       -1.85 mmbbl
Distillates         -3.36 mmbbl      vs.       -1.4   mmbbl

Oil prices have been slowly creeping higher over the last few months and this week hit highs not seen since June 2015. The price jump can be partially attributed to this weekend’s announcement that the Crown Prince of Saudi Arabia had cracked down on corruption in the region, which has the added effect of consolidating his power.

This was an unprecedented action in Saudi Arabia as no one was spared – princes, ministers and businessman alike were arrested with tens of billions in assets frozen.  It is difficult to say how much of the oil price increase was due to the Crown Prince having been in favor of the current OPEC production cap. But it’s now likely Saudi will be in favour of extending these cuts, and that probably contributed to the boost to oil prices along with the uncertainty around the potential risk to supply disruption that comes with any major political event like this.

The 28-month price high reached by WTI this week and makes sense fundamentally when you consider that US crude storage hasn’t been this low since the end of 2015. This decrease in North American storage is largely attributed to the widening spread that has existed between WTI and Brent over the last few months. The current spread is $6.46, compared a roughly $2 per barrel gap in the first half of the year. You would expect that this arbitrage should dissipate in the near term given the structure of global oil transportation – but does WTI gain or does Brent fall to close the gap?

Bottom Line: Global oil prices have broken through their resistance levels as of late. The question is – does it make Russia or some OPEC members reconsider whether the production caps are still necessary? Another uncertainty is how a WTI price above $55 impacts the shale plays that over the last two years have been uneconomical, and what strains that creates for the supply/demand balance.

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