U.S. Crude Storage Will Build In February But May Surprise To The Downside
- We are forecasting U.S. crude storage to build in February, but with imports coming in lower than expected, the balance may surprise to the downside.
- The Venezuela sanction will disrupt crude flows at least for February, so we could see imports surprise to the downside given U.S. crude imports from Venezuela are ~600k b/d.
- This also comes at a time when Saudi/Iraq tanked exports to the U.S. with January total less than ~800k b/d.
- A bullish February balance will be important since it is peak refinery maintenance season in the U.S. and it will help set the trend for the year.
- If the scenario we laid out below plays out, we see Brent returning to $70 by March/April.
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Welcome to the surprise to the downside edition of Oil Markets Daily!
U.S. crude imports surprised last week showing a drop to just ~7 mb/d, the lowest reading over the last 3 years for that week.
Readers should expect the trend to continue thanks to increasing 1) U.S. shale production, 2) lower OPEC exports to U.S., and 3) Venezuela sanctions. Point 2 and 3 will become more evident in February as U.S. refineries go into peak maintenance season. Our U.S. crude storage forecast shows February balance to show a build of ~18 mbbls versus the seasonal average of ~16 mbbls, but the recent Venezuela sanctions could force U.S. refineries to be extra cautious.
The impact of any reduction in Venezuela crude imports will have an immediate effect on PADD 3 crude storage balances.
Source: EIA, HFI Research
As you can see, the 4-week U.S. imports from Venezuela averaged ~600k b/d over the last 3-weeks, so any material drop will reduce overall U.S. crude imports.
In addition, for those that were following the data closely, U.S. crude imports from Saudi hit the lowest level since week 43 in 2017:
On a 4-week moving average basis, U.S. imports from Saudi are inching towards the targeted ~700k b/d level. Tanker tracking data shows that Saudi exported a total of ~570k b/d to the U.S. for January while Iraq exported ~210k b/d putting the total export to U.S. at only ~780k b/d. This may surprise our crude import forecast for February to the downside.
As a result, February balances may surprise to the downside if U.S. crude imports come in below our estimate. Here's the breakdown:
- Refinery throughput - 16.3 mb/d
- Exports - 2.25 mb/d
Total demand = 18.55 mb/d
- U.S. production - 12 mb/d
- Imports - 7 mb/d
Total supply = 19 mb/d
18.55 - 19 = 0.45 mb/d x 28 days = 12.6 mbbls build in U.S. crude storage
A build around 12.6 mbbls would be bullish versus the 5-year average build of ~16.4 mbbls.
Why is February important?
The oil market will be quite fixated on how storage balances develop in February. The physical oil market is showing remarkable strength, but this has not impacted the financial markets yet because of the market's concerns about crude storage builds in February. How we exit out of February will be an important indication for where U.S. crude storage balances are headed for the rest of the year.
Our data shows that one of the biggest drivers of lower U.S. crude storage balances going forward will be lower imports. Venezuela sanctions may impact crude imports in February, but loopholes around the sanctions may allow Venezuela crude to still get to the U.S. in March and onward. We are not forecasting a complete drop off of Venezuela crude imports.
Overall, we think there's a good chance that the February balance surprise to the downside in the U.S. This will help set the trend for the rest of the year. We see Brent returning back to $70/bbl by March/April if this scenario comes to fruition.
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