Welcome to the sell first ask questions later edition of Oil Markets Daily!
IEA published its latest oil market report today and one particular section of the report stood out to us. On the public side, this is the exact quote:
OECD commercial oil stocks rose 8.6 mb on the month in January to their highest level since November 2017. However, the increase was lower than the seasonal norm. Preliminary data for February points to a sharp drop in inventories.
For those of you who don't have a subscription to the IEA, the "sharp drop" in inventories was 30 mbbls. Well, to be exact, it was 29.8 mbbls. It's funny to see the IEA say sharp drop instead of giving a preliminary figure to the public, but we can save that for next time.
What's more important about this is that coming into 2019, oil market participants thought we would build like crazy. In fact, the estimate range for builds in Q1 2019 was 0.3 to 1 mb/d. But now that two months have passed, and the net global oil storage change is NEGATIVE ~21.2 mbbls, it makes us question just what oil analysts do all day.
In January, we wrote an article titled, "Here We Go Again: All Eyes On Global Oil Market Balances In Q1." In the article, we basically said that the market is overestimating the build. For starters, people are forgetting that the Q4 surplus was entirely driven by the export surge from Saudi and UAE. Second, given the oil price decline, the seasonal demand decline of 1 mb/d won't be the case. And third, we already saw from the data and guidance from the Saudi energy minister that exports were going to drop in January and February. All three led us to believe that the surplus that was meant to be won't be the case this time around.
In fact, for those who follow the oil data closely, you would've already seen this in the US total liquid stockpile data:
And March data already is off to a great start and our preliminary estimate shows a crude storage draw of 7 mbbls for the US, while total liquids are likely to show a draw slightly higher than that.
Putting all of this together, if the IEA preliminary data comes through, it would put global oil storage ~4 mbbls below the five-year average. So should the Saudis announce mission accomplish?
Foot on the pedal, the old 5-year average is what counts...
The truth is that despite the draw we saw in February, it's still not enough. Quite frankly, the Saudis understand this as well given the March and April export guidance. The reality is the US is the only place with bloated storage and most of that is in crude storage. As you can see, we are still some ~100 mbbls above the old five-year average. By our calculation, in order for the Saudis to get the desired oil price scenario of around ~$80 Brent, it needs to at least push US crude storage down to 380 mbbls.
But to keep it there despite market volatility, it will likely need to push it down closer to ~350 mbbls. Now according to our US crude storage forecast estimate, this is achievable by September if US averages ~6.8 mb/d of imports and ~2.44 mb/d of exports. The only way for the US to average this import level is if the Middle East keeps exports to US sub ~800k b/d. Most of that will have to be from Saudi Arabia, which would need to keep exports to US below ~500k b/d.
Again, we think this is very achievable with March preliminary exports and our April estimate for Saudi exports to US to be sub ~400k b/d.
As you can see, the momentum is biased to the downside, so it's only a matter of time.
But if our forecast comes to reality, then there's a strong possibility that President Trump will release an additional ~30 mbbls from SPR and dampen the crude draw we are forecasting. And when that time comes, we will reassess our US crude storage outlook.
For the time being, the old five-year average needs to be the target and Saudi Arabia needs to aim for a ~350 to 380 mbbl US crude storage target.
Over the weekend, we released a report detailing the set-up we see coming up this April. Our early estimates point to some sizable relative US crude storage draws taking place. For those interested, we are offering a 2-week free trial so you can see for yourself. We hope to see you join the HFI Research community!
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.