Analys
What is behind the recent fall in US crude oil stocks?
US crude oil stocks have fallen significantly during the summer months. This was mainly attributable to an increase in crude oil processing. In this way US refineries reacted to robust demand for middle distillates, which is reflected in low US distillate stocks and record US distillate exports. As crude oil processing declines, US crude oil stocks will likely rise again in the fourth quarter. Robust US distillate exports are exerting pressure on refinery margins in Europe, which will probably increase Europe’s dependency on imports of oil products.
US crude oil stocks have fallen significantly during the summer months. Since the end of June they have declined by 38m barrels and in mid-September reached their lowest level for 18 months. Destocking has been concentrated on two regions: in the Midwest (PADD 2) stocks have fallen by more than 20m barrels, and on the US Gulf Coast (PADD 3) by more than 14m barrels (chart 1). The lion’s share of the destocking in the Midwest related to the storage hub in Cushing, where stocks have fallen by a total of 16.5m barrels for 13 weeks in succession. What is the reason for this surprising trend and will the destocking continue?
The trend in stock levels can be divided into three sub-components: on the supply side are US oil production and US oil imports, and on the demand side, crude oil processing by refineries. US oil production has increased until recently. In mid-September it reached its highest level since May 1989 of more than 7.4m barrels per day. This component cannot therefore explain the destocking of recent weeks. On the other hand, imports of crude oil have fallen sharply. In the summer months they were, on average, 1m barrels per day lower than in the previous year. However, this will not be sufficient to balance out the simultaneous increase in US oil production. Between the end of June and mid-September this was, on average, 1.4m barrels per day above the previous year’s level. The trend on the supply side would therefore have been an indication of stockbuilding. The main reason for the significant destocking this summer is therefore to be found on the demand side, i.e. from the higher volumes of crude oil processed at refineries.
Crude oil processing in the USA was higher than usual this summer
US refineries stepped up crude oil processing much more significantly than usual this summer. Between the end of June and mid-September, an average of 16m barrels of crude oil was processed daily. This was 600,000 barrels per day more than in the corresponding period last year, and 900,000 barrels per day more than the long-term average level (chart 2). At the beginning of July, more crude oil was processed than at any time in the last eight years. It was also striking that refineries maintained processing rates at their high levels of July and August up to mid-September. Normally, refineries scale back their utilisation from the end of August as the summer driving season approaches an end. Refineries usually use the time in early autumn to carry out maintenance and to switch operations to the winter season. Hence, significantly more crude oil has been processed this summer than would otherwise be normal at this time of the year. This has only been possible by consistently dipping into crude oil stocks, although more crude oil has also been available as a result of the increased level of domestic oil production.
This cannot be explained with trends in the US gasoline market…
The fact that US refineries have increased their crude oil processing so strongly over an extended period this summer cannot be explained by trends in the US gasoline market, which is normally the most important driver of refinery activity in the summer months. Demand for gasoline in the US during the summer driving season showed virtually no increase compared to last year. US gasoline stocks have remained consistently 5 to 6 per cent above their long-term average for weeks with a few exceptions. US gasoline production was just slightly higher this summer than in the previous years. Moreover, the US exported less gasoline between March and July than one year ago, according to the EIA.
…but is attributable to distillate production in particular
The reason for the unusually high level of refinery activity over a prolonged period is above all attributable to middle distillates. US refineries have significantly increased the production of middle distillates in particular. This increased to an average of 5m barrels per day in the summer months, which was 13% higher than average for the last five years. More than half of the increase in crude oil processing this summer is therefore attributable to the middle distillates segment. The varying trend in processing margins is likely to have played a part here. While margins for gasoline production have fallen to the lowest level since end of 2011, they are still relatively high for middle distillates (chart 3). The fact that margins for middle distillates have held up much better is attributable to low US distillate stocks, which have remained well below their long-term average levels despite robust production of middle distillates.
Strong demand for distillates in and outside the USA
This is mainly the result of higher domestic demand and robust demand for distillates from abroad. Distillate demand from US consumers was 10% higher than last year during the summer months and 6% above the average of the last five years. Moreover, the USA exported 1.276m barrels of middle distillates per day on balance in July after having reached a level nearly as high in June (chart 4, page 3). Daily net distillate exports were almost twice as high in June and July as in the first four months of the year and also 26% above the same period last year. Weekly estimates from the US Energy Information Administration also indicate that distillate exports remained at a similarly high level in August and September.
Refinery activity is unlikely to sustain these exceptionally high levels
US refineries have benefited from cheaper crude oil from the country’s interior until recently, which, thanks to new pipeline capacity, can be transported to the US Gulf Coast, where roughly half of US refinery capacity is situated. This also enables US refineries to avoid the continuing restrictions on crude oil exports from the USA, since these restrictions do not apply to the export of oil products. Despite everything, US refineries are unlikely to maintain their distinctly high levels of crude oil processing of recent months, given lower margins. The EIA expects average crude oil processing of 15.3m barrels per day in the fourth quarter. This would still be more than 500,000 barrels per day above the average of the last five years, but some 600,000 barrels per day less than in the third quarter. The lower demand for crude oil from refineries indicates higher stock levels, if US oil imports are not being reduced markedly, as US oil production is likely to increase further as a result of the surge in shale oil production in North Dakota and Texas. In fact, the decline in US crude oil stocks seems to have come to an end. In the second half of September stocks were already increasing by roughly 8m barrels, due to lower volume of crude oil processing and higher oil imports.
Decline in crude oil stocks has recently also slowed at Cushing
The 13-week long decline in crude oil stocks at Cushing has also weakened visibly in recent weeks (chart 5). Whereas, between the beginning of July and the end of August, on balance an average of 1.36m barrels of crude oil per week were drained off Cushing, in September the figure had fallen to an average of less than 500,000 barrels per week. At the end of September, the decline in stocks at Cushing had almost come to an end. Should stocks be built up also at Cushing in the weeks ahead, this would not be attributable to a lack of transport or processing capacities. These are now sufficient – as the steady fall in Cushing stocks over the summer months despite rising shale oil production in the Midwest demonstrated. In fact, once the Southern leg of the Keystone XL pipeline is completed, additional transport capacities of 700,000 barrels per day will be available by year-end. A stock build-up would instead be attributable to lower crude oil processing at refineries. This should exert pressure on the WTI price in particular.
Record US distillate exports creating problems for refineries in Europe
What are the implications of these trends for Europe? According to data from the EIA, the USA was already exporting record volumes of middle distillates to Europe in May and June. Based on shipping data, this trend has continued in September. The high levels of US distillate exports will exert pressure on refinery margins in Europe. Despite low gasoil stocks, the price differential between gasoil and Brent oil has been moving in a narrow range around USD 15 per barrel for some months, which is hardly sufficient to offset the very low margins in gasoline production. The situation has been compounded by the fact that the USA itself has now become a net gasoline exporter. As a result the US market – formerly the most important sales market for European refineries – has been lost. At the same time, the USA is also competing in gasoline on other sales markets such as South America, for instance. Further refinery closures in Europe are thus on the cards, which would further increase Europe’s dependency on imports of oil products.
Analys
Crude oil comment: A price rise driven by fundamentals
Brent crude prices have maintained their upward momentum, rebounding from last week’s low of USD 70.7 per barrel, spurred by relief over limited Israeli retaliation toward Iran, which left energy infrastructure (both oil and nuclear) undamaged. Since that point, as projected, prices have risen by USD 4.6 per barrel in just seven days.
This momentum has been further fueled in the last two days by changes in market fundamentals. Reports confirming OPEC+ plans to delay its previously scheduled oil production increase, originally set for December, have contributed to the continued rise, pushing prices up to the current level of USD 75.2 per barrel.
Late last week, Brent prices were also influenced by Iranian rhetoric, with Iran pledging further retaliation. The latest WSJ report suggests that Iran may be planning a ”strong and complex” response against Israel, likely after the US election. The report also notes that Israel’s October 26 strike inflicted significant damage on Iran’s air defenses, heightening tensions. While the timing of any Iranian response remains speculative, further hostilities between Iran and Israel appear very predictable.
Despite looming geopolitical uncertainty and the potential for a heightened risk premium, the impact of current market fundamentals remains significant. To our surprise, OPEC+ has confirmed it will postpone its planned December production increase of 180,000 barrels per day.
However, this deferral doesn’t remove the target of adding a cumulative 2.2 million barrels by December 2025. OPEC+ will continue to monitor the market, increasing supply as soon as conditions favor it, which will likely keep substantial oil price gains in check over the coming year.
Analys
OPEC+ holds back on December increase while US produces more
OPEC+ will not to lift production by 180 kb/d in December as planned. Of course an effort to prevent the oil price from sliding lower. US crude oil production is at the same time ticking up by 38 kb/d/month in September and the growth pace looks like it is ticking higher by the month as new US shale oil production is growing faster than losses in existing production. US crude oil reached a new, all-time high of 13.4 mb/d in August. The US is not making it easy for OPEC+. The group is trying to tell the US: ”Slow your growth, because we need to produce more!”. To no wain it looks. Iranian sabre-rattling helps to lift Brent this morning.
Brent crude fell 3.9% last week in a sense of eased Iranian-Israeli tensions. Brent crude traded in a range of USD 70.72 – 76.05/b last week and closed down 3.9% week on week on Friday at USD 73.1/b. The low point last week was driven by relief that the Israeli retaliation towards Iran looked fairly limited with no damage to either oil infrastructure or nuclear installations. Muted rhetoric from Iran Iran to start with also helped to drive the price to its low point last week. Iranian rhetoric with promises of re-retaliation increased through the week and the oil price rose along with that towards the end of the week. What is for sure is that there will be more rocket exchanges between Iran and Israel to come. That barrier is totally broken.
But tensions are rising again as Iranian re-retaliation is in the planning. News this morning (Wall Street Journal) is that Iran is planning a ’Strong and complex’ re-retaliation attack on Israel at some point after the US election. The article also states that the Israeli attack on Iran on 26 October severely damaged parts of Iran’s air defenses. This isn’t over.
OPEC+ holds back planned increase in December to avoid price declines. Brent rises 2% to USD 74.5/b this morning as OPEC+ decides to delay its planned increase of 180 kb/d in December. The planned increase of a total of 2.2 mb/d over a 12 month period has however not been called off. That still hangs over the market as a dark cloud. It tells the market that there is limited upside in the oil price in the year to come. Global demand acceleration in 2025 – OPEC+ will take that. Disruptions in supply in 2025 – OPEC+ will step in and take that. It is only a massive loss of supply involving the Strait of Hormuz which would be out of the hands of OPEC+ to cover.
US crude oil production at new all-time high in August of 13.4 mb/d. Not making it easy for OPEC+. US production reaches new all-time high in August at 13.4 mb/d. Monthly controlled data released in late October showed that US crude oil production increased by 195 kb/d to 13.4 mb/d and a new all-time high in August. US NGLs increase by 135 kb/d to 7.03 mb/d as well. If we add together US crude, NGLs, bio, refinery gains and adjustments, then total US liquids probably came in at 23.13 mb/d in August. With US liquids demand at 20.4 mb/d it leads to a net US liquids export of 2.7 mb/d
US shale oil production growth pace is ticking higher. US shale oil production grew at a marginal, annualized pace of 451 kb/d/month in September. The annualized growth pace was 401 kb/d in August. The pace is picking up. US shale oil producers are not making it easy for OPEC+.
US crude oil production reached a new all-time high in August at 13.4 mb/d. Production of NGLs also increased. US crude + NGLs + bio + refinery gains + adjustments puts US total liquids production at more than 23.1 mb/d in August.
US shale oil production grew at a marginal, annualized pace of 451 kb/d in. The growth pace is picking up as new production grows faster than legacy losses.
Analys
Brent rises on prospect of Middle East flare-up
Brent crude prices have extended their recent rally, reaching USD 74.3 per barrel this morning, marking a gain of USD 1.25 per barrel since last evening.
Earlier in the week, signals pointed towards a potential de-escalation in Middle East tensions, with Israel reportedly considering a US-led initiative to address the conflict in Lebanon. However, as noted in yesterday’s crude oil comment, Israel’s military chief issued a strong warning, vowing a significant response should Iran attempt further aggression.
Fueling the recent surge in oil prices are reports from Axios (an American news outlet) suggesting that Iran is preparing to launch a retaliatory strike on Israel from Iraqi territory in the coming days. This heightens the likelihood of additional hostilities potentially erupting before the US election on November 5th.
According to the source, the anticipated attack would likely involve drones and ballistic missiles, with Iran potentially relying on allied militias in Iraq to carry it out. This approach may be a strategic effort by Tehran to avert a direct potential Israeli re-re-retaliation on Iranian soil.
While the situation in the Middle East could escalate sooner than expected, both Israel and Iran seem reluctant to ignite a full-scale regional war. Thus, any additional responses from Iran might remain restrained, similar to Israel’s limited strike last weekend, hence primarily intended as a demonstration of strength rather than an invitation to open warfare.
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