Oil prices strengthen on stock relief indication

"It’s not every day that the market enjoys clearly bullish news. But Wednesdays are sometimes in for a treat and prices move in the morning on indications about how crude, distillate and gasoline inventories performed the previous week.

The market’s main concern is demand and how Covid-19 affects it, so any hint that demand is recovering is welcomed with a price boost.

This morning’s API data indicated a surprise crude stock draw of more than 8 million bpd. That’s not little, taken that the market expected far less, even lower than 1 million bpd.

The difference between the numbers is big and it shows just how unpredictable stocks can be to forecast.

Our own Rystad Energy forecast for draws stood at 1.1 million bpd, a number we considered even slightly bullish. Yet here we are, one can never be too bullish.

If confirmed by the official EIA data, the rather sizeable decrease of US stocks was likely caused due to a surge in crude oil and refinery utilisation. Transfers into the Strategic Petroleum Reserve (SPR) also contributed to the weekly decline. The DOE reported yesterday that SPR inventories ticked up 1.7 million bbl to nearly 654 million bbl. So far, the DOE has received 20.5 million of the 23 million bbl of leased storage, with the rest set to be transferred by the end of June 2020.

We believe that exports rose to more than 3.5 million bpd (up from 2.9 million bpd in week 25), driven by the increased appetite for cheap US crude abroad (with large cargoes headed to China, South Korea, India, and Europe for delivery). US crude grades continue to trade at a great discount to OPEC grade crudes like Arab Light, which underwent a US$5 – 7 price bump for July deliveries and will likely see another increase for August cargoes.

Russian Urals is also trading at record premiums to Brent as production is lowered under the OPEC+ framework. Not to mention that freight rates have also decreased. The cost of hiring a VLCC for a journey from the US Gulf Coast to China has nearly halved during the last two months, from about US$15 million in late April to US$7.3 million as of mid-June.

Although we see a recovery in export volumes for week 26, the global glut of crude in floating storage continues to blow headwinds for US exports. Currently, there are 210 million bbl of crude sitting in floating storage, which can come onto the market at any time. Especially as the economics for storage become less appealing and these volumes are in direct competition with exports from the US Gulf Coast, as most of those volumes are light sweet crude from US shale basins and the North Sea.

If the API-projected inventory levels get confirmed later today, expect prices to keep their gains and the enthusiasm to stay for a while, with traders longing for the next bunch of positive news. Keep an eye on Covid-19 though and how reported infections increase in the US and beyond, that’s the Joker in the oil card deck."

Read the article online at: https://www.oilfieldtechnology.com/special-reports/01072020/oil-prices-strengthen-on-stock-relief-indication/