There were a few things to be learnt from yesterday’s bloodbath in the oil market. Firstly, the rise in geopolitical tension is only good for sharp price spikes but not for protracted strength. It was true four months ago when Saudi oil installations came under attack and it is true now. Unless physical oil supply is materially impacted financial oil supply will re-emerge. Secondly, US market players have been more confident than their Asian and European counterparts that the current stand-off with Iran would do no long-lasting damage to the supply-demand balance. Over the last three days the selling either started or intensified as the US woke up. On Monday the weakness began during London morning and prices kept falling all afternoon and even after the close. On Tuesday the peak was reached just before London mid-day after which prices drifted lower. Yesterday the strong opening was followed by some profit-taking but it was the US that put the last nails in the bulls’ coffins. Thirdly, it became obvious that neither the US nor Iran wants war. President Trump produced a spectacular U-turn in his press briefing in the afternoon saying that “Iran is appearing to be standing down” effectively ruling out US retaliation after the Iranian missile strikes at US air bases in Iraq. This is quite a change from the threat of respond in case of retaliation “perhaps in a disproportionate manner”. Iran has also done its best to calm public nerves by claiming that proportionate measures had been taken and it does not seek escalation.
Oil bulls got knocked down as oil fell and equities rose. They, however, had to suffer another major body blow, which came in the form of the weekly oil statistics from the EIA. The report was, quite simply, awful. Anything that could rise, rose. Even crude oil inventories, which were down by 5.9 million bbls, according to the API. The EIA reported a build of 1.1 million bbls as inventories in the USGC surged 2.1 million bbls. There were two main reasons for the unexpected increase. Refiners demanded less crude oil as they cut their runs by 1.5% to 93% and net crude oil imports jumped by 1.8 mbpd on the week to 3.7 mbpd. Products fared even worse, much worse actually. Gasoline inventories were up by 9.1 million bbls and distillate stocks grew by 5.3 million bbls. As a result total commercial oil stocks swelled 14.8 million bbls. The de-escalation of the Iranian crisis and rising US oil inventories pushed the price of WTI down $3.09/bbl on the day to $59.61/bbl. Brent lost $2.83/bbl to finish the day at $65.44/bbl. So, here we are now, back where we were before the assassination of General Qassem Soleimani. The sentiment soured significantly yesterday and this could put further pressure on prices. The bottom, however, is probably not far away given that the oil market had already been in an uptrend before the drone struck at Baghdad airport last Friday.
US oil stocks built last year, independence grew
US commercial oil inventories increased last year by 25 million bbls or 2%. It logically means that OECD industrial stocks also built as more than 40% of it is stockpiled in the US. From this respect 2019 was not a particularly positive year. Although those who decided to put their money in oil at the end of 2018 produced some stellar returns (RBOB gained more than 40% including rollovers, WTI and Brent rallied more than 30%) on the average price basis 2019 was a very lacklustre year. The year-on-year positive performance was partly down to the massive sell-off in 4Q 2018. On the other hand, front-month Brent averaged $7.53/bbl or 10% below the 2018 price. WTI fell $7.86/bbl or 12%. In other words, the OECD and US oil stock build is nicely reflected in the average price.
The 25 million bbls year-on-year increase in US commercial stocks, however, was not because of jumps in the main categories. In fact, combined crude oil, distillate and gasoline stocks fell 4.7 million bbls – the draw of 11.5 million bbls in crude oil inventories was coupled with a slight build of 2.5 million bbls in gasoline and 4.3 million bbls in distillate stocks. The big annual jump came from propane where stocks increased by 17.5 million bbls or 25%, from 70.6 million bbls at the end 2018 to 88.1 million bbls a year later.
The most notable changes occurred on the crude oil front – not in inventories but in production and exports/imports. Using weekly data US crude oil production average 12.3 mbpd last year, up from 10.8 mbpd in 2018. This 1.5 mbpd growth compares with a production increase of the same extent in 2018. Nearly 1.3 mbpd of this increase took place in shale oil producing areas. If the latest monthly EIA report is to be believed domestic production growth will slow to 930,000 bpd this year.
The rise in crude oil output had a profound impact on oil exports/imports. Gross crude oil imports fell more than 1 mbpd to 6.8 mbpd in 2019 and gross crude oil exports increased by the same extent. Consequently, net crude oil imports were down 2 mbpd at 3.9 mbpd. This is 3.1 mbpd and 3.6 mbpd less than in 2017 and 2016. The impact of the US shale industry is tangible. Add to that the stable US net product exports and domestic demand (the former averaged 2.8 mbpd last year and the latter 20.8 mbpd) and the growing US independence on foreign oil becomes obvious. Total US net crude oil and product imports stood at 1 mbpd in 2019, down from 2.9 mbpd in 2018 and 4.3 mbpd in 2017. In case one wonders what’s shaping a big part of US foreign policy these days, the answer is in the above numbers.