Yesterday was a fun day for crude.
As documented here extensively, oil initially plunged on reports that Riyadh raised output to over 10m b/d in February, reversing 1/3 of the cuts made in January.
Oil promptly plunged.
Apparently surprised at just how closely the market still listens to the kingdom, Riyadh pulled a “just kidding,” and tried to play the whole thing off. Here was the result:
As if that wasn’t enough “crude” excitement for one day, we got the latest API numbers which showed a surprise inventory draw. To wit:
- Crude inventories fell 531k bbl last week
- Cushing +2.06m
- Gasoline -3.88m
- Distillates -4.07m
So that’s notable because i) a U.S. crude draw would be first decline since December when compared with EIA data, and ii) the median forecast for today’s EIA print is a 3.13m bbl build. Naturally, crude spiked on this news:
Well, as we wait patiently to see if the EIA numbers confirm the API draw, Goldman wants you to know two things: 1) Tuesday’s headlines out of Saudi Arabia were really a non-event, and 2) the bank’s baseline is that contrary to reports (but consistent with Heisenberg’s own thinking) OPEC will not in fact extend the production cuts. Here’s more…
Oil prices are declining further today [Tuesday] following the release of February output estimates by OPEC which featured higher Saudi production. These data points were however for “direct communication” reporting, with the “secondary sources” used to track compliance to the cuts showing instead sequentially lower production for Saudi and on aggregate in February. Further, Saudi Arabia has since commented that the extra production was dedicated to domestic storage and not the international market, which would help reverse the 57 million barrel decline in crude stocks in the Kingdom since October 2015 and be consistent with higher refinery runs locally in February. As a result, we believe that data available across sources for February continues to show rising compliance to the cuts, consistent with our prior assessment.
We therefore reiterate our view that the oil market rebalancing is still progressing, with continued evidence of strong demand over the past weeks comforting us in our forecast that oil demand is finally set to overtake supply in 2Q17, helped by the cuts and despite the expected rise in US shale output. Our expectations that inventories will draw through 2017 therefore leads us to expect that Brent timespreads will continue to strengthen with the forward curve in backwardation by 3Q17.
We however also reiterate our view that we believe it is not in OPEC’s interest to extend its cuts beyond six months as its goal is to normalize inventories, not support prices. As a result, our base case remains that the production cuts will be followed by new production highs. Combined to the shale ramp up and greater visibility on the majors shifting focus to future growth, we see potential for long-dated oil prices to continue to decline below our $50/bbl long term price forecast.
“OPEC’s ‘secondary sources’ data, revised to include Wednesday’s IEA estimates, show 11 members bound by Nov. 30 output agreement pumping 29.79m b/d in Feb. vs 29.92m b/d in January,” a person familiar with matter told Bloomberg on Wednesday.
The “numbers are different from OPEC monthly report published Tuesday as not all secondary sources were included in assessment,” the person added.
Meanwhile, from the IEA:
- Oil stockpiles across developed nations climbed in January for 1st time in 6 months
- IEA predicted smaller drop in inventories during 1H than previously amid weaker assessment of demand growth
- “For those looking for a re-balancing of the oil market, the message is that they should be patient”