DB Today -Global/Macro:Thursday,2November 2017
Commodities - Hsueh On Oil - Michael Hsueh
Inventory draws driven by lower net imports.
With US crude oil exports stimulated by a profitable arb against Brent, we are nowseeing the opposite of the inventory "visibility" problem. Instead of US inventoriesshowing a surplus while the rest of the world quietly draws down, the US hasdeclined year on year in tandem with OECD inventories. The wider WTI-Brentspread helps the situation both by stimulating exports and also suppressing theincentive to produce. Thus, US fundamentals are a substantial factor behind themore positive backdrop for oil prices.
In the first three weeks of the year, impressively counterseasonal declines inUS crude oil inventory have accompanied the well-supported energy complex.
This dynamic appears likely to continue, sustaining prices above equilibriumfor the time being. The main causes will not be a surprise: growing domesticproduction (enabling lower imports), and the WTI discount to Brent (resulting inhigher exports). From the global perspective, stronger US exports would normallydisplace supply elsewhere, but a sharper decline in Venezuelan productioncreates a gap for the US to fill (quality difference notwithstanding). In sum, weworry that if prices remain well supported over the first quarter (the only surplusquarter in our model this year), there may be less likelihood of a decline in thesecond to fourth quarters.
Quantifying the contributions.
Weekly US crude oil inventory declines have averaged -4.3 mmbbl per week, incontrast to last year's increases of +3.1 mmbbl per week. How much of this canbe attributed to the rise in crude oil exports and decline in crude oil imports?On a year over year basis, net imports have fallen by -1,078 kb/d, equating to7.5 mmbbl per week, roughly equivalent to the 7.4 mmbbl change in the rate ofinventory changes. The rise in refiner net inputs of +350 kb/d contributes another2.4 mmbbl per week to the improvement in inventory draws, offsetting the 2.4mmbbl decline in the error term. Last year, the positive error term of +2.07 mmbbl/wk implied higher than reported production in January 2017, and this figure hasnow declined to -0.35 mmbbl/wk.
Narrowing window for price moderation.
Although investors' excitement should normally be tempered by the realisationthat global balances are unmoved by US surpluses being absorbed externally,in this case the sharper decline in Venezuela offsets this flow to some extent.
Venezuelan production fell by -160 kb/d in December, and a cumulative -420 kb/d since July 2017. As a result, for the OPEC-12 countries originally a party to theAlgiers Accord, production of 29.59 mmb/d is now as much as -631 kb/d belowthe promised 30.221 mmb/d (as of Dec-17). Thus the market may be interpretingincreased US exports as required to fill this widening OPEC gap, and a sign ofhealthy global demand. With the first quarter as the only quarter in surplus thisyear, the window for price moderation on a fundamental basis may be narrowing.