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Key Points

Earlier this week, the U.S. Energy Information Administration (EIA) reported commercial stocks for last week ended July 7. The EIA’s crude stocks for this report week moved lower by a seasonally strong 7.56 million barrels (MMbbl) to 495.35 MMbbl vs. expectations of a 2.45 MMbbl decline. On top of those declines, the Strategic Petroleum Reserve also sold 3.2 million barrels of crude, the largest reported sale this year yet.

Commercial stock levels are closing in on year-ago levels, as shown by the data from last year at this time wherein crude stocks were 491.17 MMbbl. Gasoline inventories went down by 1.65 MMbbl during the report week to 235.66 MMbbl, while distillate inventories went higher by 3.13 MMbbl to 153.55 MMbbl. Combined, total U.S. commercial petroleum stocks picked up steam for the report week and now stand 16.86 MMbbl above last year’s level and 163.83 MMbbl up from the contemporaneous five-year average.

Intraday on July 14, West Texas Intermediate (WTI) crude prices traded at $46.46/bbl, which represents a $2.23/bbl rise over the close of the EIA report week seven days ago and compares to $45.68 /bbl a year ago.

Demand

On the domestic demand side, EIA’s reported refinery runs gained during the report week by 0.10 Mbbl/d to a weekly average of 17.24 MMbbl/d, which compares to a weekly average refinery run rate of 16.54 MMbbl/d a year ago. Demand in the export market for U.S. crude exports for this report week rose by 0.15 Mbbl/d to an average for the report week of 0.92 MMbbl/d, which compares to an export rate of 0.60 MMbbl/d a year ago.

The data for implied demand for petroleum products, as represented by the EIA’s volumes supplied to the consuming market, show an average for this report week running at 19.96 MMbbl/d vs. 22.23 MMbbl/d the prior report week, both stronger than the year ago data point of 19.51 MMbbl/d. That said, the EIA’s total demand data for this report week came in below the five-year average for this week.

Supply

On the supply side, field production of crude oil this report week rose by 0.06 Mbbl/d to an average weekly value of 9.40 MMbbl/d, which is up from last year’s 8.49 MMbbl/d output rate. Supplies imported from foreign producers dropped by 0.13 MMbbl/d this EIA reporting week to an average of 7.61 MMbbl/d, which is lower than last year’s 7.84 MMbbl/d import level.

Rig Counts

The Baker Hughes active U.S. rotary rig count this week remained unchanged from the previous week’s 952 rigs. Oil rigs did go up by two to 765, offset by gas rigs contracting by two to 187. Compared to last year, this week’s U.S. active rig count is 505 rigs higher than last year’s level of 447 working rigs.

Commitment of Traders

The CFTC’s July 14 commitment of traders report for New York Mercantile Exchange (NYMEX) light, sweet crude oil futures and options showed that reportable financial positions (managed money and other) on July 11, 2017 were 405,935 net long while reportable commercial operator positions came in with a 413,012 net short position. Total open interest was reported for this week at 2,857,567 and was down 40,900 lots from last week’s reported 2,898,467 level.

Sequentially, commercial operators this reporting week were cutting longs by 15,968 while adding to shorts by 14,425. Financial speculators cut shorts and cut longs for the week (-33,853 vs. -14,100, respectively). The net long decline this week, which follows a net long gain last week, shows operators clearly seem to be less optimistic this week while financial speculators appear to be even more bullish that perhaps a bottom has formed, given a net long gain this week after a net long gain last week.

Benchmark Prices, Differentials and Margins

The Brent dated spot price closed July 14 at $48.50/bbl, up by $1.97 /bbl from the end of the EIA report week seven days ago. A year earlier, the Brent dated spot price stood at $45.69/bbl. The differentials between Brent and WTI spots lost ground by $0.26/bbl to $2.04/bbl, which compares to $0.01/bbl a year ago.

U.S. Gulf Coast 321 crack spreads averaged $16.37/bbl for the week, which represents a bump of $0.42/bbl over the week and compares very well to the $11.46/bbl for this week last year.

Northwest Europe 321 crack spreads using Bloomberg’s local daily prices and Brent dated spot crude averaged $11.57/bbl for the week, which represents an upward ramp of $0.10/bbl over the prior week and compares to $7.64/bbl this week last year. Southeast Asia 321 crack spreads using local prices and Minas crude averaged $12.60/bbl for the current week, which represents a bump up of $0.74/bbl over the prior week and compares to $8.14/bbl this week last year.

Quarterly and Annual Fundamental Comparables

The EIA’s weekly data for U.S. field production of crude oil is running quarter-to-date at 9.37 MMbbl/d and is undershooting our quarterly forecast of 9.48 MMbbl/d. Gulf Coast 321 Refinery crack spreads using daily Bloomberg data are running at $16.10/bbl for quarter-to-date, seriously outpacing our estimate of $10.74/bbl for the full period. WTI crude spot prices have averaged $45.50/bbl quarter to date, which is well under our $54.77/bbl forecast for the quarter.

Year to date, U.S. field production of crude oil is running at 9.17 MMbbl/d, according to the available EIA weekly data, and is below our yearly forecast of 9.32 MMbbl/d. The EIA’s weekly refinery run data is averaging 16.56 MMbbl/d for the year to date vs. our full-year forecast of 16.37 MMbbl/d. The EIA’s weekly implied demand for gasoline and distillate as determined by the product supplied to the market is running at 9.13 and 4.00 MMbbl/d vs. our full year estimates of 9.03 and 3.82 MMbbl/d, respectively.

The EIA’s total refined product demand year-to-date this week is running at 19.82 MMbbl/d, which is higher than our full-year estimate of 19.18 MMbbl/d. Our tally of daily Bloomberg Gulf Coast 321 refinery crack spreads is running $14.46/bbl for year-to-date, vs. our estimate of $10.59/bbl for the full period. WTI crude spot prices have averaged $49.73/bbl year-to-date vs. our $52.62/bbl forecast for the full year.

News and Views

Magellan Longhorn Pipeline Segment Ruptures: Magellan Midstream Partners announced that a contractor working on its Longhorn pipeline system struck a fitting on the pipeline approximately 4 miles southwest of Bastrop, Texas, causing a release. The 275,000 barrel per day Longhorn Pipeline, which transports crude oil from Crane, Texas, to Houston, had the ruptured segment shut down and isolated. Until a repair and restart occurs, we believe the gap in crude takeaway will likely be filled without too much disruption by available capacity on other Permian area pipelines.

Compliance Cratered in June, Monthly OPEC Report Shows: members as a group achieved only 50% compliance with the reduction target in June, the lowest level since January. This OPEC compliance trend is not the oil price bull’s friend. See our report among the North American Oil Service analysis links.

Mexico’s Energy Reforms Pay Off With New Offshore Oil Find: This week, Talos Energy LLC and its partners announced a find of a 1.4 billion to 2 million barrels of gross oil in place discovery based on a successful exploration well drilled in one of their blocks held offshore Mexico in easily accessible shallow water.

Although this first-of-its-kind privately drilled offshore Mexico well shows the merit of Mexico’s recent energy reforms, more low-cost light oil is not exactly what North American oil markets, and by extension global markets, need at present.

We believe the field will likely have significant amounts of associated natural gas which will be difficult and costly to do anything with other than flare. While development plans are yet to be made, the field is likely to help increase Mexico’s net crude exports while not impacting U.S. natural gas exports via pipeline to the industrial north and central portion of inland Mexico.