Weekly Oil Storage Report - The End Is Near

Summary

• The EIA reported a bearish oil storage report with crude storage build higher than we expected.
• Higher U.S. oil production and lower refinery throughput explained the difference in our forecast, +1.76 mil bbls vs. +3.019 mil bbls.
• For next week, we have a preliminary forecast of +2.63 million bbls.
• Crude storage will reach the new five-year average soon.
• We are currently forecasting two more crude storage builds before the steady decline starting toward the second half of March.

Welcome to the weekly oil storage report edition of Oil Markets Daily!

Highlights

This week's EIA oil storage was bearish. The crude storage build of 3.019 million bbls was higher than our estimate last week of +1.76 million bbls. The drop in exports was expected as the EIA looks to have counted the barrels that were being exported out in the Feb. 23 week in the Feb. 16 week. Refinery throughput was almost 100k b/d lower than we expected, but production came in about ~100k b/d higher than we expected. The adjustment factor was also positive, explaining the differences in our forecast and what the EIA reported.

This also coincided with the EIA 914 report that showed U.S. oil production fall 108k b/d month over month. But as we explained in a previous EIA 914 article, the decline was seasonal and U.S. oil production growth remains on track. As a result of the recent positive adjustment, we have February U.S. oil production tracking 10.327 million b/d. We have made the adjustments in our storage forecast, which you can see in the crude section below.

Cushing balances dropped 1.218 million bbls week over week. Storage is now sitting at 28.785 million bbls. Gasoline storage increased 2.483 million bbls week over week, which was bearish compared to the five-year average draw of 1.959 million bbls. Distillate storage change was bullish with a draw of 960k bbls vs. a five-year average change of +28k bbls.

Total liquid stockpile came in higher week over week by 3.726 million bbls compared to the five-year average of 1.22 million bbls. Refinery throughput came in lighter than we expected at 15.882 million b/d. U.S. crude production increased to 10.283 million b/d with Lower 48 production increasing to 9.772 million b/d, or 10k b/d week over week.

Trued up U.S. oil production came in at 10.535 million b/d, or a 4k b/d week-over-week decrease as the adjustment (unaccounted for crude oil) came in at 252k b/d vs. 256k b/d last week. We saw SPR storage increase by 406k bbls, which decreased the build in crude storage.

Overall, this report was bearish and the build was higher than what we expected last week. However, our bullish Q1 storage forecast remains unchanged as refinery throughput will start to increase within the next three weeks, and lower crude imports going forward will start to draw U.S. crude storage again by the middle of March.

Next Week's Forecast

We currently have a preliminary crude storage build of 2.63 million bbls for the week of March 2. We expect refinery throughput to be slightly lower week over week. We expect crude exports around 1.4 million b/d.

On the supply side, we have adjusted higher U.S. oil production to 10.25 million b/d, and crude imports will come in slightly higher at 7.38 million b/d. These are preliminary forecasts, and crude imports and exports can swing the balance materially.

Crude

For next week, we have +2.625 million bbls vs. the five-year average build of +5.564 million bbls. As you can see in the first chart, crude storage is now just ~6 million bbls above the new five-year average. We expect this level to be reached by March 9, 2018.

As you can see in our Q1 crude storage projection, we expect there to be two to three more builds between now and the end of March. After that, we should see U.S. crude storage steadily decrease into year-end.

The end is near, and we expect the deficit in U.S. crude storage to start reflecting the global deficit in Q2 this year.

Cushing

Cushing storage continued to decline last week. Warren Pies, Energy Strategist for Ned Davis Research, had this to say about why Cushing has been drawing so steeply:

(We encourage you to read the Tweet thread).

Pies comes to the conclusion that Cushing is drawing because of the global oil market rebalancing and the strength seen in the Louisiana Light Sweet spread to WTI has resulted in an accelerated draw in Cushing (see his explanation here).

Gasoline

Gasoline was the most bearish number this week, with a build of 2.483 million bbls vs. a five-year average draw of 1.959 million bbls. Gasoline prices took a hit following the storage report, and next week shows another seasonal decline in gasoline.

If gasoline storage continues to report bearish storage figures, then we expect refinery throughput to decrease more. That will prompt potentially higher U.S. crude storage builds than we currently expect.

Distillate

Distillate storage came in lower than the five-year average. Next week will show another seasonal decline. We expect to see distillate storage track the five-year average change.

Refinery Throughput

Crude Imports

Crude imports came in lower than we expected this week. This was a positive sign, although some traders were pointing to EIA under-reporting imports again this week as possibly explaining the positive adjustment factor. Going forward, we expect crude imports to be much lower year over year as one of the tenants to our bullish Q1 storage forecast was lower crude imports from OPEC in Q1.

Crude Exports

Crude exports pulled back from the ~2 million b/d the previous week. As we noted last week, there were timing issues with the crude exports, and this week's decline was to be expected. We are still forecasting the rest of Q1 to have a 1.4 million b/d crude export average.

U.S. Oil Production + Adjustment

U.S. oil production came in higher week over week, but the highlight was the EIA 914 report. Using the trued up U.S. oil production method (weekly + adjustment), we have February U.S. oil production averaging 10.327 million b/d.

There is still one more week of data that needs to go in this, so we will report back next week what our final adjusted U.S. oil production figure is. Going forward, we have re-based U.S. oil production higher to 10.25 million b/d, and expect U.S. oil production to end the year around 11.25 to 11.28 million b/d.

Total Liquid Stockpile

Total liquid stockpile storage build also came in higher than the five-year average. While total liquid stockpile YTD is negative, this week's balance change was bearish, and the year-over-year comparison worsened. The five-year average next week shows total liquid stockpile to be basically unchanged.

Days of Supply

Conclusion

The end is near. Seasonal maintenance is at its highest in February (followed by a smaller one in April), and we are currently forecasting lower crude imports as the result of lower OPEC crude exports in Q4 2017. U.S. crude exports combined with higher refinery throughput in the next few months will start to put downward pressure on U.S. crude storage, as our forecast shows.

On the physical side, Chinese physical buying should come back with strength now that the Lunar New Year is over. We expect to see Brent reflect the global oil market strength first, and WTI to follow after.

Overall, the surplus in crude storage will be gone relative to the new five-year average by the first half of March. We then expect U.S. crude storage to keep falling for the rest of 2018.

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.