EIA Follows Through With Large Storage Draws, But Price Action Was Muted

Summary

• EIA follows through with crude storage draws of 7.564 million bbls.
• Year-over-year oil stockpile decline is increasing.
• Physical market tightens while flat price languishes.

Storage Report

EIA reported crude storage draw of 7.564 million bbls today versus the API estimate of -8.1 million bbls.

Source: EnergyBasis

Total oil stockpile dipped 3.891 million bbls week over week, which increased the year-over-year deficit to 16.805 million bbls. See chart below:

Here's another view of the storage rebalance taking place:

The large week-over-week decrease in crude storage came despite SPR release of 3.15 million bbls. DOE on Monday released news that SPR release was 2.6 million bbls. With SPR release of 3.15 million bbls this week, this leaves only 150k bbls of SPR release left until November.

Other notable statistics this week to note include higher Lower 48 production by another 25k b/d; but given the recent STEO published by EIA, US crude production is overstated currently at just below 9.4 million b/d. The negative adjustment element in this storage report also increased to -376k b/d.

Lastly, the draw came as a result of a 132k b/d decrease in crude imports. Traders said that imports were closer to 8.2 million b/d versus the 7.610 million b/d reported by EIA, but we will also point to import figures in June when we said that EIA overstated imports by a factor of 800k to 900k b/d.

Dismal Price Action

This is the second week in a row now that EIA reported much better-than-expected storage draws only to see prices fall immediately after. Several oil traders we spoke to today point to massive lots being sold following the price rally as if the seller was indiscriminate of the price.

Mexico's 2018 hedging program is still underway where it is purchasing over 200 million bbls of put protection. Some traders attribute the recent weakness on any rally resulting from market makers hedging their exposure.

Physical Market Tightens

Despite weak flat prices, physical spreads around the globe have tightened considerably. China's refineries, with their new quotas, have taken lots of floating storage in, and the Atlantic Basin is no longer cluttered with unsold barrels.

Global demand growth according to BCA Research could be as high as 1.5 million b/d, resulting in steep global storage draws in the second-half of the year. We are already starting to see the tightness come through in medium to heavy spreads.

Concluding Thoughts

Fundamentals in the oil market remain bullish with the global storage rebalancing underway. As the physical market tightens, it's only a matter of time before flat prices follow through. Mexico's hedging program should be finished by the end of July.

We have not changed our bullish stance on oil prices and remain confident that the global rebalancing will help push oil prices higher by year-end.

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.