Actual Build/(Withdrawal): 10,071
Economist Average Estimate: 2,670
Thesis (as of January 13, 2015)
We expect Brent/NYMEX $62.50/$57.50 oil prices this year and $85/$80 next year. In our view, the negative supply implication of lower global oil resource capitalization over the next two years, evident in the U.S., supports a long-term Brent/NYMEX oil price forecast of $100/$92.50. A long-term Brent/NYMEX $100/$92.50 oil price is sufficient to generate an industry norm ~5% return on invested capital.
We believe from Saudi’s perspective, the magnitude of the necessary supply reduction, largely attributable to robust growth in U.S. tight oil, rendered the role of swing producer less economic than maintaining output and allowing oil prices to fall meaningfully below equilibrium in the near-term.
CIBC World Markets
Monster Crude Build on Lower Runs
Today’s bearish oil inventory report triggered a knee jerk reaction lower in WTI (prices have since clawed back to pre-pre-release levels). The EIA showed crude inventories building across all regions. The aggregate increase totaled over 10 mb, marking the largest WoW stockbuild in over a decade. The bulk of the increase was concentrated in the Midcontinent (+7.3 mb), which included a +2.9 mb increase at Cushing. Refinery turnaround season is ramping up again, but runs (-984 kbd) were cut by more than the maintenance schedule would imply, which suggests voluntary run cuts due to poor margins. The biggest WoW drop in runs came from the Gulf (-428 kbd) and the Midcontinent (-338 kbd), coinciding with the regions where we saw the largest stockbuilds. Aggregate refinery utilization fell to the lowest point since Apr’13.
Total US planned maintenance through the first half of the year is expected to be relatively light compared to seasonal norms. Planned work will average just over 750 kbd in February (which is the month with the heaviest scheduled work), which compares to the five year average of almost 1.1 mbd. Planned turnarounds taper off significantly come March and April. While spring maintenance is looking fairly light, fall maintenance is expected to be much heavier than normal with scheduled work nearly double the five year average in September (990 kbd vs historical avg of 490 kbd) before climbing to 1.3 mbd in October (35% higher than normal).
Flow on the Marketlink and the Seaway pipes from Cushing to the Gulf fell almost 80 kbd last week. This marks the first week that flow on the combined lines fell since the Seaway Twin came into operation mid last month. Operational issues were reported on the twinned line last week. The historical relationship between storage utilization at Cushing and term structure suggests either that front spreads are in oversold territory given current storage levels or that the market is pricing in large builds at Cushing over the coming weeks. The latter likely holds some merit.
There is chatter of cargos carrying West African barrels headed for the US. While this has yet to show up in the weekly data, there could be legs to the story given the strength in LLS relative to Brent, the excess storage capacity available in the US and further yet given that the tight Brent-Bakken spread will likely weigh on railed barrels from the Bakken and could potentially open the door for WAFs into the US East Coast.
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