This report is available to subscribers of Stratas Advisors’ North America and North American Oil services.

Key Points: The EIA reported crude stocks for the week ended March 10 moved down by 0.24 million barrels (MMbbl) to 528.16 MMbbl vs. expectations of a 3.13 MMbbl surge. Last year at this time, crude stocks were 492.16 MMbbl. Gasoline inventories went lower by 3.06 MMbbl during the report week to 246.28 MMbbl, while distillate inventories went lower by 4.23 MMbbl to 157.30 MMbbl. Combined, petroleum stocks climbed for the report week and now stand 22.69 MMbbl above last year’s level and 226.40 MMbbl up from the contemporaneoU.S. five-year average. Intraday on March 17, WTI crude prices traded at 48.77 $/bbl, which represents a $0.28/bbl gain over the close of the EIA report week and compares to $40.20/bbl a year ago. With OPEC already complying with cuts, the focU.S. for U.S. crude becomes the higher than expected field supply, coupled with Strategic Petroleum Reserve (SPR) crude coming into the market. This should keep U.S. crude stocks being a heavy overhang on any crude price upside.

  1. Petroleum Releases: Part of that gain in commercial crude stocks can likely be attributed to this week’s sell off of crude oil out of the SPR. Reported at 117 Mbbl/d, this is the second SPR release showing up this year in the EIA’s weekly oil data report. This will not be the last. This SPR release is greater than the EIA’s estimated country-level crude imports into the U.S. this reporting week from two OPEC member nations, Angola (71 Mbbl/d) and Kuwait (79 Mbbl/d). The 2017 SPR selloff is likely to be complete in the first half. By end of June, we expect in excess of 16 million barrels of crude to have been released to U.S. market participants. Actual year to date SPR releases have only amounted to 1 million barrels. That’s an average about 1 MMbbl per week from now through June to meet sales mandates for 2017. By grade, the crude being released is classified as light sour crude. Upstream operators are also raising field production of light sweet and sour crude oil by deploying more drilling and completion rigs this year vs. last. Combined, greater production and SPR releases should continue to dampen WTI price movements to the upside. And 2017 is only the first of several years of SPR crude selloffs of as much as 174 MMbbl of SPR crude oil. For more insight on the future of mandated SPR releases, North American Oil Service subscribers can refer to our recent OCW analysis dated 02/24/17 and our full SPR release analysis report last year.

Demand: On the domestic demand side, EIA’s reported refinery runs fell during the report week by 0.02 Mbbl/d to a weekly average of 15.47 MMbbl/d, which compares to a weekly average refinery run rate of 16.00 MMbbl/d a year ago. Demand in the export market for U.S. crude exports for this report week decreased by 0.18 Mbbl/d to an average for the report week of 0.72 MMbbl/d which compares to an export rate of 0.39 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 19.46 MMbbl/d vs. 19.90 MMbbl/d the prior report week, both up from the year ago data point of 18.66 MMbbl/d. That said, the EIA’s total demand data for this report week came in under the five-year average for this week.

Supply: On the supply side, field production of crude oil this report week gained by 0.02 Mbbl/d to an average weekly value of 9.11 MMbbl/d, which is higher from last year's 9.07 MMbbl/d output rate. Supplies imported from foreign producers decreased by 0.75 MMbbl/d this EIA reporting week to an average of 7.41 MMbbl/d, which is weaker than last year's 7.69 MMbbl/d import level.

Rig Counts: The Baker Hughes active U.S. rotary rig count this week picked up steam by 21 over the week to 789 rigs, with oil rigs up by 14 to 631 and gas rigs added heft by 6 to 157. Compared to last year, this week’s U.S. active rig count ascended by 313 from last year’s level of 476.

Pricing/Differentials and Margins: The Brent Dated spot price closed March 17 at $51.22/bbl, higher by $0.56/bbl from the end of the EIA report week seven days ago. A year earlier, the Brent dated spot price stood at $40.56/bbl. The differentials between Brent and WTI spots increased by $0.28/bbl to $2.45/bbl which compares to $0.36/bbl a year ago.

  1. Gulf Coast 321 crack spreads averaged $13.86/bbl for the week, which represents a bump up of $1.33/bbl over the week and compares to $12.88/bbl this week last year.

    Northwest Europe 321 crack spreads using Bloomberg’s local daily prices and Brent dated spot crude averaged $7.49/bbl for the week, which represents a decline of $1.69/bbl over the prior week and compares to $5.46/bbl this week last year. Southeast Asia 321 crack spreads using local prices and Minas crude averaged $11.71/bbl for the current week, which represents a surge of $0.84/bbl over the prior week and compares to $11.74/bbl this week last year.

Sequential and Annual Comparable Fundamentals: The EIA’s weekly data for U.S. field production of crude oil is running quarter to date at 8.98 MMbbl/d and is over our quarterly forecast of 8.80 MMbbl/d. Gulf Coast 321 Refinery crack spreads using daily Bloomberg data are running at $13.25/bbl for the quarter to date, vs. our estimate of $7.15/bbl for the full period. WTI crude spot prices have averaged $52.52/bbl quarter to date vs. our $48.55/bbl reference case outlook for the quarter.

Year to date, U.S. field production of crude oil is running at 8.98 MMbbl/d according to the available EIA weekly data, and is undershooting our yearly forecast of 9.08 MMbbl/d. The EIA’s weekly refinery run data is averaging 15.93 MMbbl/d for the year to date vs. our full-year forecast of 16.83 MMbbl/d. The EIA’s weekly implied demand for gasoline and distillate as determined by the product supplied to the market is running at 8.61 and 3.84 MMbbl/d vs. our full-year estimates of 9.16 and 3.82 MMbbl/d, respectively. The EIA’s total refined product demand year to date this week is running at 19.48 MMbbl/d which is outperforming our full-year estimate of 19.64 MMbbl/d. Our tally of daily Bloomberg Gulf Coast 321 Refinery crack spreads is running $13.25/bbl for the year to date, vs. our estimate of $10.20/bbl for the full period. WTI crude spot prices have averaged $52.52/bbl year to date vs. our $52.95/bbl forecast for the full year.

News and Views

OPEC Compliance Again Strong in February: OPEC released its monthly oil production data for February which allows U.S. to calculate a compliance rate of 108% using a similar method and base that we had when we published a 94% compliance rate in our January OCW based on OPEC data then. Financial media outlet Marketwatch is reporting that the IEA is counting February compliance now at 91% but due to this week’s revisions by OPEC of their January data, the IEA now sees revised January compliance at 105%. In any case, the reality appears that OPEC is doing a fine job complying at nearly 100% with compliance cuts in the first two months of 2017, which, given recent oil price weakness, we would expect to continue to be required. All that said, it appears that our reference case crude price outlooks for first-quarter 2017 cited throughout this report are too conservative since they were based on 60% compliance. In addition to the reference scenario based on 60% compliance, we also ran a “full compliance” scenario with 100% compliance by OPEC. Our first-quarter 2017 “Full Compliance” BDT price outlook of $53.28/bbl compares much better to actual quarter to data, which, if our $2.22/bbl differential outlooks hold, implies a $51.08/bbl first-quarter 2017 “Full Compliance” WTI price outlook. This higher price outlook, made for conditions which anticipated full compliance which seems to be mostly true quarter to date, is in much better agreement with the $52.52/bbl WTI spot price average quarter to date than is our now seemingly too-bearish reference case WTI outlook based on only a 60% OPEC compliance rate.

Phillips 66 is conducting an open season for its Rodeo project: A new Permian regional pipeline system is being proposed by Phillips 66 (NYSE: PSX) with an initial capacity of 130 Mbbl/d that will have originations stations in Reeves, Loving, and Winkler counties in Texas, as well as at Odessa, Texas. The pipeline system will include destination options at Wink, Texas; the Phillips 66 Partner’s Odessa station; a new terminal to be built near Odessa as part of the Rodeo Project; and at Midland, Texas. The pipeline system is expected to come online in second-half 2018. With crude and condensate production rising in the Permian this year and going forward, we would expect this project to be a “go” in very short order.

TransCanada and M2 partnership to build new storage facility in Cushing: Just in time for greater Permian and other inland crude production gains, TransCanada Corp. (NYSE: TRP) in partnership with M2 Infrastructure LLC announced plans to build a 6.2 MMbbl crude storage in Cushing, Okla. The project is scheduled to begin in late 2017 with TransCanada expected to operate the storage once it comes online. The partnership also includes an option to build up to 20 million barrels of storage.