In recent weeks, the crude oil market has finally started to show signs that it could be heading toward rebalancing—the stated goal of OPEC’s cuts and the favorite buzzword of analysts and officials this year.
Saudi Arabia is cutting crude oil exports, notably to the U.S., in a renewed effort to influence the oil market after inventories continue to be high seven months into the production cut deal. At the same time there is record-high refinery input in the U.S. this summer.
Summer is a peak demand season outside the U.S. as well. In Saudi Arabia, crude oil is used to generate electricity for air conditioning, so Saudi exports are typically lower in summer months. But OPEC’s biggest exporter and de facto leader is pledging to cut August exports to 6.6 million bpd, which would be a nearly 1-million-bpd drop in total Saudi exports compared to the export level last year.
After a sluggish first quarter, global demand growth is also accelerating, and this is also expected to contribute to draining the excess supply.
In the U.S., crude oil refinery inputs averaged 17.3 million bpd during the week ending July 21 – this was an increase of 166,000 bpd from the previous week’s average, the EIA said in its latest weekly inventory data release. At the same time last year, in the week to July 22, 2016, crude oil refinery inputs were 16.586 million bpd.
Commercial crude oil inventories dropped in the week to July 21 this year by 7.2 million barrels from the previous week, to 483.4 million barrels.
According to the API, total U.S. petroleum demand in June was the highest for the year and the highest for the month of June in ten years.
On the other hand, U.S. imports of Saudi crude oil dropped in June to the lowest level since last November, according to ClipperData. Imports in July further dropped, and Saudi flows to the U.S. are at their lowest level since February 2015.
Since OPEC is cutting mostly medium and heavy grades supplies, demand for those has been up this year, which has led to a narrower spread between Louisiana Light Sweet (LLS) and Mars medium sour, Reuters columnist John Kemp has calculated.
The contango in the oil market is also shrinking, pointing to a tighter market.
On the global demand side, the International Energy Agency (IEA) said in its July Oil Market Report that after a lackluster 1.0-million bpd growth in the first quarter this year, there was a dramatic acceleration to 1.5 million bpd in the second quarter. “For 2017 as a whole, demand is forecast to reach 98.0 mb/d, with growth revised up by 0.1 mb/d compared to last month's Report to 1.4 mb/d,” according to the IEA.
The strong U.S. crude inventory draws in the past four weeks, coupled with Saudi Arabia’s pledge to curb exports in August, boosted oil prices last week, and last Friday they finished their best week of the year. WTI Crude futures jumped 8.6 percent last week, and Brent Crude also gained around 9 percent.
The market sentiment, which was extremely bearish a month and a half ago, has started turning, according to some analysts.
“In a big way, we’re having a switch of market expectations from one that thinks these inventory problems are going to persist forever and ever to a situation where increasingly markets are starting to believe in this whole rebalancing, particularly in the United States,” Bart Melek, head of global commodity strategy at TD Securities in Toronto, told Bloomberg.
Inventories were expected to drop in the peak summer season. Now the market and investors are waiting to see if it’s just a seasonal trend, or if the glut is really starting to shrink.
By Tsvetana Paraskova for Oilprice.com
