Large oil draw surprises market

Sep 8, 2016 2:39:53 PM EST

 As a humongous draw to oil inventories has wrong-footed the market, crude prices have ripped higher in response. Hark, here are five things to consider in oil markets today:

1) Let's cut to the chase; that was a pretty epic weekly EIA inventory report. The 14.5 million barrel draw to crude inventories was the second-largest on record, and the largest since January 1999. The draw took many by surprise, although we reported to clients last Friday that we expected a draw of over 10 million barrels.
 
The draw was driven by tropical activity in the Gulf of Mexico, and specifically Hermine. Imports into the US Gulf dropped by a whopping 760,000 barrels per day on the prior week, while imports to PADDs 1, 3 and 5 dropped by a whoppingly whopping 1.87mn bpd.
 
In addition to the storms materially impacting imports, we also saw temporary shut-ins in the Gulf causing a drop of ~150,000 bpd in production. To add further bullish hues to this report, refinery runs increased to their highest level since August 2015 at 16.93mn bpd, while gasoline inventories drew down by 4.2 million barrels. 
 
refinery_runs_Sept.jpg
 
2) Before we revisit production freeze prognostications, let us check on the scores on the doors for OPEC oil exports for August...and they are once again at a new record. Funny that:
 
OPEC_aug_loadings.jpg
3) The potential variances involved with a production freeze are huge. If Iran, Nigeria, and Libya were exempt from any production freeze, then we could in theory still see another over 2 million barrels per day of production coming to market in spite of everyone else freezing.

Iran is targeting 4 million barrels per day, some ~400kbd higher than its current level, while Nigeria is ~450kbd adrift of its production level of 2mn bpd earlier in the year. Finally, under the (highly) unlikely scenario that Libya could increase production back to pre-civil war levels, another 900kbd could be coming to market also.

production_freeze_and_capacity.jpg

4) The sub-header below regarding producing more / supporting a freeze is one of 57 varieties of rhetoric we have been getting from the likes of Russia, Iraq, Iran et al.

Iraq is apparently willing to entertain a production freeze, but only after reaching a certain level of output, and one which is higher than where they are currently.

Comments from Falah Alamri, the head of Iraq's State Oil Marketing Co. (SOMO) endorse this notion, as he declares an expectation for steady growth in oil output and exports for next year.

Iraq_production.jpg

5) The chart below helps to illustrate the point we make above regarding record OPEC exports; it underscores the change in stance by OPEC since that infamous meeting in November 2014 (h/t @ronbousso1). OPEC's oil market share has been ticking higher since, as Iran, Iraq and Saudi ramp up their crude exports. Increasing flows from Nigeria and Libya (should they happen) will only further improve this percentage:  

OPEC_market_share.jpg 

About the Author

Matt Smith

deciphers and distills what is most relevant across the energy complex into cohesive and pithy knowledge you can use. The belly laugh is a bonus.

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