Does recent plunge in crude oil futures signal further weakness?
Intercontinental Exchange (ICE) July Brent tumbled sharply the week of May 21, 2017, on the heels of comments from Saudi Arabia’s energy minister, Khalid al-Falih, who said the extension will allow OPEC to accomplish its goal of drawing inventories to the five-year average by the end of the year. But crude oil prices continued to drop, falling at one point May 26 to below $51/bbl. The drop likely signaled that many traders have concluded that deeper cuts are necessary.
Craig notes that the distinct air of cynicism over the OPEC supply cuts will likely prevail until EIA weekly data shows U.S. crude oil imports—particularly from Saudi Arabia—begin to trend lower. The five-week moving average for crude imports has averaged 8.12 MMbbld since April, which was 374,000 bbld more than the same period in 2016. Despite imports holding up, crude stocks fell seven straight weeks through the week that ended May 19, 2017, because of strong refinery utilization. To date, U.S. crude oil inventories have trimmed the surplus to the five-year average by 17 MMbbl to 109 MMbbl.
Analysts surveyed by S&P Global Platts expected U.S. crude stocks to fall 3.2 MMbbl the week ended May 26, which if confirmed by the Thursday EIA report, delayed by a day due to the Memorial Day holiday, could easily exceed the average 300,000-bbld decline from 2012-2016. The challenge for the Saudis is demonstrating that its exports are falling while not simultaneously ceding market share to rivals that could hurt long-term relationships with customers. “We cannot, and will not, withdraw completely from the U.S.,” al-Falih said.
Platts comments that this has been particularly evident when looking at Saudi Aramco official selling price discounts for U.S. buyers. Arab medium and heavy official selling prices (OSPs) continue to hold the lower levels targeted back in late-2014, when Aramco was well known to have been advocating for keeping market share, rather than supporting prices. Nevertheless, al-Falih said there will be a “marked decline” in exports to the U.S. and other destinations. But this, too, has proved disappointing to many bulls, as al-Falih said the decline would materialize, in part, because of strong peak summer demand.
In Asia, a major battleground for exporters, some crude traders questioned whether producers will choose to maintain compliance with peak summer demand approaching. “The summer season will be the key,” a north Asian refiner source said. “It will be a focal point—whether producers can comply and endure their production cuts. Competition has stiffened this year in Asia with arbitrage volumes owing from the Atlantic Basin as well as the U.S., making it difficult for Middle East suppliers to back off, S&P Global Platts reports. In April, Japan imported an average of 1.32 MMbbld of crude oil from Saudi Arabia, which was 15.8% more than a year earlier, according to data released by Japan’s Ministry of Finance.
Further, strong U.S. refinery utilization, which has been the biggest factor behind ongoing draws on crude stocks, could be soon viewed as bearish on balance unless the gasoline market starts whittling down surplus stocks. Refinery utilization has averaged 92.9% of capacity over the last four reporting periods, compared with 89.8% a year ago over the same period. Analysts expected utilization to increase to 94% the week ended March 26. Meanwhile, refinery economics have encouraged runs.
(SOURCE: The Weekly Propane Newsletter)
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