Weekly Oil Storage Report: Where Was The Storage Build In Q1?

Summary

• EIA reported a crude storage draw of 4.617 million bbls versus our forecast for a 6.11 million bbl draw.
• This report marked the end of Q1 storage balances, which saw crude build only 869k bbls, while total US liquids stockpile decreased 39.69 million bbls.
• US crude exports also came in at a record high of 2.175 million b/d following our last week's commentary.
• Going forward, the bullish Q1 storage balance bodes very well for storage balances for the rest of 2018.

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

Highlights

EIA reported a crude storage draw of 4.617 million bbls versus our forecast of -6.11 million bbls. The big differences in our forecast and the report were the much-higher-than-expected crude imports offset slightly by the increase in crude exports. Production also came in higher, and along with the positive adjustment, the crude storage draw was lower than what we had forecasted. Nonetheless, oil bears that thought Q1 2018 would see U.S. oil storage build will be sorely disappointed to find a nonexistent build in crude and a draw in total liquids stockpile.

This shouldn't have been a surprise to any of our readers, as we had been table-pounding that Q1 2018 will turn out to be much more bullish than people expected.

On the refined products side, gasoline and distillate storage changes came in line with the 5-year averages. This is encouraging to see given refinery throughput has been much higher than the five-year average, and yet, refined product storage is tracking the five-year average. In addition, total liquids stockpile continues to decrease and went below 2015 levels today.

This week also saw U.S. crude exports hit a new all-time high of 2.175 million b/d. This was following our weekly oil storage report last week, where we said that U.S. crude exports are expected to keep increasing for the rest of the year on the back of a supportive Brent-WTI spread and LOOP starting to load VLCCs for crude exports.

The one bearish data point that came in this week was the higher-than-expected crude imports. Our forecast for Q1 2018 was for crude imports to average below the 5-year average, but that wasn't the case, leading U.S. crude storage to show minimal build versus our bull case for a storage draw.

With Q1 coming to a close and crude storage building a measly 869k bbls, the storage draws coming in Q2-Q4 will surely surprise the market in both magnitude and speed. As the global oil markets continue to be undersupplied for the rest of 2018, Brent-WTI spread should remain here and possibly widen by the second half of this year, leading to a higher crude export average. This would result in 2018 to be another record year in terms of storage draw not only in the U.S. but also in the world.

In addition, if the global oil balance is indeed going to be as tight as we forecast, U.S. crude imports should start to fall materially, leaving more tailwind for crude storage draws. Market participants, however, do need to be aware that SPR release starts in May this year and will carry through to October, cushioning some of the draws we are forecasting.

Nonetheless, how we finished oil storage in Q1 was vitally important for the oil bull thesis for the rest of 2018, because the lack of storage build results in a smaller balance to go through for the rest of 2018. This will be another year of record oil storage drawdowns around the world, and we think oil prices will soon reflect this.

Next Week's Forecast

For next week, we have a preliminary storage draw of 1.15 million bbls. The reduced storage draw w-o-w comes from lower refinery throughput as another month of seasonal maintenance gets underway. We are forecasting higher crude exports this week, followed by slightly lower crude imports.

Going forward, the key variable to keep an eye on is crude imports, because this will largely dictate how material the crude storage decline is for the rest of the year.

Crude

We are now exiting Q1 2018 with a crude storage build of 869k bbls versus the 5-year average of +27.682 million bbls.

The lack of build in Q1 will help set the starting point for the crude storage draws that are expected for the rest of 2018. Once refinery throughput increases materially in May, the crude storage drawdown will accelerate, leading to even lower storage balances ahead. Here's our newest forecast for crude storage by the end of April:

(Premium subscribers get access to our full-year forecast.)

We think the storage drawdown that's going to come in the rest of 2018 will surprise in both magnitude and speed.

US Oil Production and Adjustment

U.S. oil production rose 27k b/d w-o-w to 10.46 million b/d. Adjustment factor (unaccounted for crude oil) came in at +93k b/d, putting trued-up U.S. oil production at 10.553 million b/d.

We have revised higher our base U.S. oil production forecast by 10k b/d, but kept the exit production rate the same at 11.25 million b/d.

At the moment, U.S. oil production will have to get through a big near-term hurdle in the Permian. Natural gas takeaway capacity is starting to depress local basin pricing, and takeaway capacity for oil has started to see spreads widen materially. In our view, this could put a near-term headwind on Permian oil production, which would translate into lower supplies and higher storage drawdowns. However, in our forecast, we maintain the +25k b/d w-o-w growth.

If U.S. oil production does start to stall due to takeaway capacity constraints, the adjustment factor will be the first to reflect that by turning negative. We have not seen that yet.

Gasoline

Gasoline storage dropped in line with the 5-year average. Next week, gasoline storage drops, seasonally speaking. Given our assumption that refinery throughput decreases next week, we also see a gasoline draw.

Distillate

Distillate storage saw a build of 537k bbls, which was slightly higher than the 5-year average. As refinery throughput drops, we see distillate storage declining slightly next week.

U.S. Crude Exports

Last week, we wrote that U.S. crude exports were on the rise. LOOP loaded its second VLCC last week for export, and with Brent-WTI spread widening again, this supports higher US crude exports going forward.

Our bullish view on oil is that Brent will need to lead the way for WTI for the rest of 2018. One of the key drivers is for U.S. crude exports to remain elevated as to support the increasing deficit in the rest of the world. Chinese crude buying will also be crucial to how exports play out, but early indications point to strong oil demand in China, which will support the elevated U.S. crude exports going forward.

Cushing

Refinery Throughput

Crude Imports

Total Liquids Stockpile

Days of Supply

Conclusion

With Q1 coming to a close, we couldn't be happier about the bullish balances reflected. Q2 to Q4 should notch another record year of oil storage decline as global supply and demand remain in deficit into year-end and into 2019. The swift drop in storage in the coming months will jolt the complacency in the market, and the consensus looking for U.S. shale to tip the market back into oversupply will be sorely disappointed.

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.