CRUDE OIL INVENTORY/’000 bbls (Week Ended 1/23/15)
Actual Build/(Withdrawal): 8,874
Economist Average Estimate: 4,000
Raymond James Equity Research
This week’s petroleum inventories update was modestly bullish relative to consensus. “Big Three” petroleum inventories (crude, gasoline, distillates) rose by 2.4 MMBbls, versus consensus estimates for a build of 2.9 MMBbls. Crude inventories, however, increased by 8.9 MMBbls, more than double the consensus expectation for a build of 3.9 MMBbls. Cushing crude inventories rose by 2.1 MMBbls, with Gulf Coast inventories up 5.5 MMBbls. Total petroleum inventories were up 2.0 MMBbls.
Refinery utilization sharply rose to 88.0% from 85.5% last week. Total petroleum imports were 9.8 MMBbls per day, up from last week’s 9.4 MMBbls per day. Total petroleum product demand increased 1.5% after last week’s 5.1% increase.
Amid a rapidly shifting macroeconomic and geopolitical backdrop, there has been plenty of volatility in oil prices over the past year – including an exceedingly sharp correction from mid-2014 through the present, taking prices to five-year lows. During the past six months, negative datapoints have come out of several key economies: China, Japan, and the eurozone. Demand continues to decline for OECD countries in aggregate, and demand growth in China and other emerging markets is slow, in part due to declining oil intensity. On the supply side, non-OPEC supply is trending up, driven largely (though not exclusively) by robust growth in the U.S. Of course, the wildcard remains the possibility of supply disruptions (above and beyond the lingering outages in Libya). The geopolitical risk premium in oil prices has clearly subsided, strength in the U.S. dollar has further pressured oil prices, and OPEC’s Nov. 27 decision not to cut production eliminated that potential source of support. Bearing all that in mind, on January 5 we cut our 2015 Brent forecast from $90/Bbl to $68, and WTI from $75 to $62. We anticipate that prices will continue to bottom in the first half of 2015, followed by a stronger recovery in the second half and into 2016 – but not back to triple digits. The 12-month futures curve is currently at $60.65/Bbl for Brent and $55.96/Bbl for WTI.
Demand of ~20.5 Mmbpd increased ~1.5% w/w, and the four-week moving average increased ~80 bps to ~4.7% higher y/y. Gasoline demand of ~9 Mmbpd was up ~2% w/w, and distillate demand increased ~1% to ~4.6 Mmbpd. In ’15, we expect U.S. demand to increase ~1% y/y to ~19.2 Mmbpd.
Composite inventories increased ~2.4 Mmbbls, versus the consensus estimate of a ~2.9 Mmbbls build w/w. API reported a ~7 Mmbbls increase in composite inventories w/w. Crude oil supplies grew ~8.9 Mmbbls, while consensus expected a ~3.9 Mmbbls increase and API estimated a build of ~12.7 Mmbbls. Gasoline stocks decreased ~2.6 Mmbbls versus the consensus estimate of a ~0.5 Mmbbls build w/w. API reported a draw in gasoline stocks of ~5 Mmbbls w/w. Distillate inventories decreased ~3.9 Mmbbls w/w, versus the consensus estimate of a ~1.5 Mmbbls draw. API reported a decrease in distillate stocks of approximately 0.7 Mmbbls.
Cushing stocks increased ~2.1 Mmbbls w/w to ~38.9 Mmbbls, while API reported a build of ~2 Mmbbls. Midwest stocks grew ~1.1 Mmbbls to ~120 Mmbbls. WTI increased ~$0.35 after the report release though is currently down ~$1.17 today at ~$45.06.
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.
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