After what feels like 23 days of rallying amid conflicting commentary from various key global producers about a potential production freeze, prices have hit the pause button today, shifting focus towards another round of impending inventory data. Hark, here are six things to consider in oil markets today:
1) Yesterday we discussed how OPEC members from the Middle East have increased crude loadings by 3.3 million barrels per day since the beginning of last year. Throw in the rest of OPEC, and a drop in crude loadings from other cartel members (think: Nigeria, Venezuela et al) offset the increase from the likes of Saudi Arabia, Iran and Iraq. This means loadings across the cartel are up 2.3mn bpd over this period. As our ClipperData illustrate below, OPEC loadings are kicking around 25mn bpd.
2) Last week, EIA reported 1.5 million barrels per day of oil imports into PADD5 (the West Coast), the highest level since April 2014. We projected a considerably lower number than this. EIA also reported a 2.5 million barrel draw to oil inventories on the West Coast, the biggest draw in eleven months, despite reporting refinery runs only dropping by a mere 35,000 bpd.
EIA also reported its largest adjustment to last week's report since February 2015, unable to balance supply and demand. Counting the cargoes and reconciling with the import bills, our ClipperData again see a low volume of imports into the West Coast last week; but as we saw from the prior week's report, this doesn't mean EIA will report the same.
3) The mighty Abudi Zein is the author of this absolutely great piece out on RBN Energy, which outlines how the global product glut is likely to play out. It explains the intracacies of the global distillate market, and how the U.S. is weaved into this patchwork quilt: 'if East Coast refiners were to reduce output, the door would open to cheap imports of middle distillates from South Korea on the East Coast, and from a host of East Asian nations (including China) on the West Coast. Similarly, a reduction in U.S. Gulf Coast output would open the door wider to Saudi Arabia to take European market share'. Be sure to read the whole piece.
4) Last week, we had mixed messages from the monthly OPEC and IEA reports; OPEC saw OECD oil and product inventories edge lower last month, while IEA saw them rise to a record of 3,093 million barrels. Nonetheless, both affirm a glut-like state.
Stripping out the U.S. piece of the pie, the chart below illustrates that high inventories are not just a U.S. phenomenon; in terms of days of forward demand cover, stocks for both Europe and Asia-Pacific are at their highest levels in at least two decades (via Bloomberg):
5) Even U.S. oil inventories of late have been gaining ground versus year-ago levels. After starting the year 100 million barrels higher than in January 2015, we have seen the year-over-year surplus whittled lower through the first quarter to less than half that level by April.
The surplus to last year has held at ~60 million barrels through Q2, before increasing by 10 million barrels in the last five weeks as U.S. oil inventories have failed to track the seasonal trend of drawing down strongly in July. Lower margins have finally encouraged refinery runs to drop below last year's levels, buoying stocks.
6) As new global LNG capacity comes online, the market is continuing to evolve - shifting away from traditional long-term, oil-indexed contracts and towards contracts with greater flexibility. Global LNG trade increased by 2.5 percent last year to 33 Bcf/d, with nearly 30 percent of this traded on a short-term or spot basis. This is up from 18.9 percent in 2010.
Shorter term contracts may not always be cheaper than longer-term contracts, but they provide greater flexibility and liquidity, ultimately strengthening the bargaining power of buyers. This trend is only going to be enhanced over the coming years as new capacity comes to market; it is estimated that up to 6.5 Bcf/d could be available on the spot market by 2020.