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What is behind the recent fall in US crude oil stocks?

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Commerzbank commodities research

Commerzbank commoditiesUS 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.

Commerzbank energy forecastUS 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.

Change in crude oil stocks

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.

Crude oil and distillate

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.

US distillate exports and destocking at Cushing

Analys

Brent prices slip on USD surge despite tight inventory conditions

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SEB - analysbrev på råvaror

Brent crude prices dropped by USD 1.4 per barrel yesterday evening, sliding from USD 74.2 to USD 72.8 per barrel overnight. However, prices have ticked slightly higher in early trading this morning and are currently hovering around USD 73.3 per barrel.

Ole R. Hvalbye, Analyst Commodities, SEB
Ole R. Hvalbye, Analyst Commodities, SEB

Yesterday’s decline was primarily driven by a significant strengthening of the U.S. dollar, fueled by expectations of fewer interest rate cuts by the Fed in the coming year. While the Fed lowered borrowing costs as anticipated, it signaled a more cautious approach to rate reductions in 2025. This pushed the U.S. dollar to its strongest level in over two years, raising the cost of commodities priced in dollars.

Earlier in the day (yesterday), crude prices briefly rose following reports of continued declines in U.S. commercial crude oil inventories (excl. SPR), which fell by 0.9 million barrels last week to 421.0 million barrels. This level is approximately 6% below the five-year average for this time of year, highlighting persistently tight market conditions.

In contrast, total motor gasoline inventories saw a significant build of 2.3 million barrels but remain 3% below the five-year average. A closer look reveals that finished gasoline inventories declined, while blending components inventories increased.

Distillate (diesel) fuel inventories experienced a substantial draw of 3.2 million barrels and are now approximately 7% below the five-year average. Overall, total commercial petroleum inventories recorded a net decline of 3.2 million barrels last week, underscoring tightening market conditions across key product categories.

Despite the ongoing drawdowns in U.S. crude and product inventories, global oil prices have remained range-bound since mid-October. Market participants are balancing a muted outlook for Chinese demand and rising production from non-OPEC+ sources against elevated geopolitical risks. The potential for stricter sanctions on Iranian oil supply, particularly as Donald Trump prepares to re-enter the White House, has introduced an additional layer of uncertainty.

We remain cautiously optimistic about the oil market balance in 2025 and are maintaining our Brent price forecast of an average USD 75 per barrel for the year. We believe the market has both fundamental and technical support at these levels.

Oil inventories
Oil inventories
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Analys

Oil falling only marginally on weak China data as Iran oil exports starts to struggle

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SEB - analysbrev på råvaror

Up 4.7% last week on US Iran hawkishness and China stimulus optimism. Brent crude gained 4.7% last week and closed on a high note at USD 74.49/b. Through the week it traded in a USD 70.92 – 74.59/b range. Increased optimism over China stimulus together with Iran hawkishness from the incoming Donald Trump administration were the main drivers. Technically Brent crude broke above the 50dma on Friday. On the upside it has the USD 75/b 100dma and on the downside it now has the 50dma at USD 73.84. It is likely to test both of these in the near term. With respect to the Relative Strength Index (RSI) it is neither cold nor warm.

Lower this morning as China November statistics still disappointing (stimulus isn’t here in size yet). This morning it is trading down 0.4% to USD 74.2/b following bearish statistics from China. Retail sales only rose 3% y/y and well short of Industrial production which rose 5.4% y/y, painting a lackluster picture of the demand side of the Chinese economy. This morning the Chinese 30-year bond rate fell below the 2% mark for the first time ever. Very weak demand for credit and investments is essentially what it is saying. Implied demand for oil down 2.1% in November and ytd y/y it was down 3.3%. Oil refining slipped to 5-month low (Bloomberg). This sets a bearish tone for oil at the start of the week. But it isn’t really killing off the oil price either except pushing it down a little this morning.

China will likely choose the US over Iranian oil as long as the oil market is plentiful. It is becoming increasingly apparent that exports of crude oil from Iran is being disrupted by broadening US sanctions on tankers according to Vortexa (Bloomberg). Some Iranian November oil cargoes still remain undelivered. Chinese buyers are increasingly saying no to sanctioned vessels. China import around 90% of Iranian crude oil. Looking forward to the Trump administration the choice for China will likely be easy when it comes to Iranian oil. China needs the US much more than it needs Iranian oil. At leas as long as there is plenty of oil in the market. OPEC+ is currently holds plenty of oil on the side-line waiting for room to re-enter. So if Iran goes out, then other oil from OPEC+ will come back in. So there won’t be any squeeze in the oil market and price shouldn’t move all that much up.

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Analys

Brent crude inches higher as ”Maximum pressure on Iran” could remove all talk of surplus in 2025

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SEB - analysbrev på råvaror

Brent crude inch higher despite bearish Chinese equity backdrop. Brent crude traded between 72.42 and 74.0 USD/b yesterday before closing down 0.15% on the day at USD 73.41/b. Since last Friday Brent crude has gained 3.2%. This morning it is trading in marginal positive territory (+0.3%) at USD 73.65/b. Chinese equities are down 2% following disappointing signals from the Central Economic Work Conference. The dollar is also 0.2% stronger. None of this has been able to pull oil lower this morning.

Bjarne Schieldrop, Chief analyst commodities, SEB
Bjarne Schieldrop, Chief analyst commodities, SEB

”Maximum pressure on Iran” are the signals from the incoming US administration. Last time Donald Trump was president he drove down Iranian oil exports to close to zero as he exited the JCPOA Iranian nuclear deal and implemented maximum sanctions. A repeat of that would remove all talk about a surplus oil market next year leaving room for the rest of OPEC+ as well as the US to lift production a little. It would however probably require some kind of cooperation with China in some kind of overall US – China trade deal. Because it is hard to prevent oil flowing from Iran to China as long as China wants to buy large amounts.

Mildly bullish adjustment from the IEA but still with an overall bearish message for 2025. The IEA came out with a mildly bullish adjustment in its monthly Oil Market Report yesterday. For 2025 it adjusted global demand up by 0.1 mb/d to 103.9 mb/d (+1.1 mb/d y/y growth) while it also adjusted non-OPEC production down by 0.1 mb/d to 71.9 mb/d (+1.7 mb/d y/y). As a result its calculated call-on-OPEC rose by 0.2 mb/d y/y to 26.3 mb/d.

Overall the IEA still sees a market in 2025 where non-OPEC production grows considerably faster (+1.7 mb/d y/y) than demand (+1.1 mb/d y/y) which requires OPEC to cut its production by close to 700 kb/d in 2025 to keep the market balanced.

The IEA treats OPEC+ as it if doesn’t exist even if it is 8 years since it was established. The weird thing is that the IEA after 8 full years with the constellation of OPEC+ still calculates and argues as if the wider organisation which was established in December 2016 doesn’t exist. In its oil market balance it projects an increase from FSU of +0.3 mb/d in 2025. But FSU is predominantly part of OPEC+ and thus bound by production targets. Thus call on OPEC+ is only falling by 0.4 mb/d in 2025. In IEA’s calculations the OPEC+ group thus needs to cut production by 0.4 mb/d in 2024 or 0.4% of global demand. That is still a bearish outlook. But error of margin on such calculations are quite large so this prediction needs to be treated with a pinch of salt.

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