Brent’s contango narrowed sharply Monday, suggesting that a tightening of the global supply and demand balance could already be underway
While oil futures have rallied this past week over talk of a more balanced global market, any prolonged price increase must grapple with bloated US crude oil inventories just as the market enters its typical shoulder season, according to S&P Global Platts latest analysis.
Analysts surveyed Monday by S&P Global Platts are looking for a crude oil draw down of 200,000 barrels for the latest reporting week ended last Friday.
If confirmed, such a draw would fall shy of the average 550,000-barrel-decline seen for this period during 2011-15.
Operational problems last week at a pair of major US Gulf Coast refineries likely dampened crude demand, putting upward pressure on inventories.
On the flip side, these types of disruptions can also tighten product balances, and could be a factor in the expectation for a 1.8 million barrel decline in gasoline inventories.
Distillate stocks, expected to decline 500,000 barrels last week, may have also come under downward pressure from an uptick in exports to Europe.
A fire broke out last week at the 235,000-b/d Motiva-operated refinery in Convent, Louisiana, and forced the evacuation of workers.
In Pascagoula, Mississippi, Chevron unexpectedly shut the crude distillation unit at its 360,000-b/d refinery, possibly due to a power outage.
Refinery utilization on the Gulf Coast had been staying well-above 90 per cent, but these outages could begin taking a toll on a regional and national level.
Analysts are looking for total refinery utilization to fall 0.8 percentage points to 91.4 per cent of capacity, far below the plus-95 per cent level seen a year ago at this time, according to Platts.
The start of turnaround season, which typically commences right after the US Labor Day holiday, will likely pull refinery utilization even lower.
Weak margins caused by a glut of refined products may have convinced refiners on the US Atlantic Coast and in the Midwest to begin that process even earlier than usual.
For the week ending August 5, refinery utilization plunged 4.9 percentage points to 80.6 per cent on the Atlantic Coast and was down 4.3 percentage points to 93.4 per cent in the Midwest, according to Energy Information Administration data.
The drop in seasonal crude oil demand usually ushers in a period of builds in crude inventories during the autumn; but the shift from draws to builds has already appeared ahead of schedule this summer.
Crude oil inventories have risen the last three reporting periods, pushing stocks more than 37 per cent above the five-year average for the same time of year.
Despite that streak of builds, traders embraced the message conveyed last week by the International Energy Agency that the global surplus has essentially been erased.
This headline helped push prompt-month New York Mercantile Exchange crude oil futures to $45.60/b Monday afternoon, the highest level in nearly a month.
In addition, Intercontinental Exchange Brent’s contango narrowed sharply Monday, suggesting that a tightening of the global supply and demand balance could already be underway.
While less refinery activity would be bearish for crude, it also could tighten of the gasoline market, something the summer driving has mostly been unable to accomplish.
Gasoline inventories on the Atlantic Coast equaled 70.9 million barrels the week ending Aug. 5, a 24.2 per cent surplus to the five-year average.
Meanwhile, distillate stocks were 3.4 million barrels above a year ago at 151.196 million barrels.
Greater exports to Europe could help reduce this surplus.
So far in Aug., exports of distillates totaling around 1.87 million metric tons (mt) have loaded from the Gulf Coast for discharge in Europe, according to an S&P Global Platts analysis.
That compares with a total of 1.6 million mt shipped across the Atlantic on that route in July. The 2016 peak was 2.03 million mt in April.