A seasonal drawdown in U.S. crude oil inventories appears underway, but the upside potential for crude oil futures prices could be limited unless inventories can reduce the huge surpluses to historical levels, according to a preview of the U.S. Energy Information Administration (EIA) data by S&P Global Platts.

Survey of Analysts Results:

-Crude oil stocks expected to decrease 1.4 million barrels
-Refinery utilization expected to increase 0.6% percentage points
-Gasoline stocks expected to draw 1.25 million barrels
-Distillate stocks expected to fall 750,000 barrels

S&P Global Platts Analysis

Despite three straight weekly declines in oil inventories levels — which have helped buoy crude oil futures prices to around $50 per barrel (/b) — the rally appears to have stalled, as inventories at 532.476 million barrels remain around 33% above the five-year average of U.S. Energy Information Administration (EIA) data, according to a Platts preview.

This means that crude stocks will have to decline by sizeable amounts — essentially 12 million barrels each week — in order to bring the current level of oversupply back near historical norms by Labor Day.
Alas, analysts surveyed Monday by S&P Global Platts expect EIA data Wednesday to show crude stocks fell just 1.4 million barrels for the week ending June 10.

Last summer’s crude inventories saw consistent declines but actually boosted the surplus to the five-year average. This corresponded with a steep drop in crude prices. Prompt New York Mercantile Exchange (NYMEX) crude futures were around $60/b last June, but fell to below $40/b by late August 2015.

One factor that could help crude stocks see bigger draws this year is the fact that refinery utilization will likely begin the summer period at a relatively subdued rate, leaving greater scope for crude runs to rise.

Refinery utilization has hovered on either side of 90% since March. It equaled 90.9% of capacity the week ending June 3, and analysts believe it rose 0.6% percentage points last week to 91.5% of capacity. By comparison, refinery utilization stood at 93.1% of capacity last year at this time.

GASOLINE, DISTILLATE STOCKS EXPECTED TO DRAW

The EIA reported a surprise build last week in gasoline and distillate stocks, though reformulated blend stock for oxygenate blending (RBOB) and ultra-low sulfur diesel (ULSD) futures still rose as part of a broad rally in the oil complex.

Traders might not overlook similar builds this week, especially if implied* gasoline demand ticks lower for a second week in a row.

Strong U.S. gasoline demand emerged during the spring as a key factor in the oil market, but the ensuing supply response prevented gasoline stocks from falling too sharply.

U.S. gasoline stocks have maintained a surplus at more than 10% to the five-year average despite robust-looking demand.

Ample stocks, in turn, have weighed on the economics for refiners of turning crude into gasoline.

The front-month Intercontinental Exchange (ICE) RBOB crack spread against Brent has dropped below $15/b from plus $22/b in late March.

An increase in demand as driving season gets underway or a decline in production will likely put upward pressure on the RBOB crack, and offset the notion that a global crude glut has shifted to refined products.

Analysts anticipate a drop of 1.25 million barrels in gasoline stocks for the latest reporting week.

One factor that could mitigate the draw was Motiva’s restart last week of an 88,000-b/d fluid catalytic cracker (FCC) and a 20,000-b/d alkylation unit at its Port Arthur, Texas, refinery complex.

For distillates, the question has become whether recent strength can persist through the summer.

U.S. distillate stocks declined seven consecutive weeks until the week ending June 3 when inventories increased 1.75 million barrels.

Steady draws pushed the ULSD crack against Brent to the $13-$14/b range, nearing parity with the RBOB crack, an unusual event for this time of year when gasoline demand is near its peak.

Analysts surveyed Monday expect distillate stocks to show a decline of 750,000 barrels for the latest reporting week.

While exports provide an additional outlet for U.S. production, recent data using cFlow, Platts trade flow software, suggest a month-over-month decline.

So far in June, loadings of distillates, mostly diesel, from the Gulf Coast to Europe total roughly 1.6 million metric tons (mt), a Platts analysis Monday showed.

That compared with a total of 1.89 million mt of U.S. product that arrived in Northwest Europe, the Mediterranean and North Africa.
Source: S&P Global Platts