Near term crude prices could be topping out as liftings increase out of the Arabian Gulf as well as non-OPEC Latin America and Russia. Full data analysis is inside this note, but from a high level we expect data-watchers to get nervous about supply in the coming weeks, as pent up liftings from deeper than expected 1Q production cuts hit the market.
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We expect the EIA to report a 2.3MM bbl crude inventory draw for the week ended 4/12. That contrasts with consensus’ 1.0MM bbl build and is predicated on our expectation of higher exports and a jump in refinery utilization w/w. We also assume zero supply adjustment, whereas the prior week’s report again showed a large positive adjustment.
Wolfe participated in 3.5 days of NYC investor meetings with the XOM IR team – including Neil Hansen, Molina Albright, and Rosina Chaker – as well as a breakfast meeting with CEO Darren Woods. The increased transparency effort is resonating well with investors. Our overall estimate and valuation framework built around 2020 is unchanged, although favorable non-commodity cost trends embedded in EPS growth were reiterated. With no direct modeling change outcome from meeting content, we publish our meeting notes herein.
We are combining 1Q19 earnings preview and post-earnings tactical thought piece for IOCs and Refiners because Downstream fundamentals are materially influencing quarterly IOC earnings variance. 1Q19 headwinds to refining margins are well understood by Refining investors and we believe reporting sequentially down 1Q results within an environment of positive 2Q momentum could lift an overhang on the sector. IOC impacts from Downstream could be more of a surprise, but we believe the improved current margin environment could be highlighted on conference calls to positive effect.
We expect the EIA to report a 7.1MM bbl crude inventory build for the week ended 4/5, above consensus’ 2.5MM bbl build. Our number assumes flat production, zero supply adjustment, imports up significantly, exports up modestly and refinery runs down marginally vs the prior week. The x-factor will likely continue to be the EIA’s supply adjustment factor which has been large and positive the last two weeks, driving the surprise builds.
Earlier this week, RDS agreed to a 2MM tpa sale and purchase agreement (SPA) with NEXT. Separately, TOT agreed to contribute $500MM of equity (entitling TOT to 1MM tpa of capacity) to TELL’s Driftwood project, along with a 1.5MM tpa offtake agreement from TELL’s own equity position in Driftwood. These announcements reflect 1) an improving LNG macro view among IOCs; 2) ongoing shift in new LNG offtake toward portfolio players and away from point-to-point sales to end users; 3) global attention on Waha gas prices, which have turned negative and support sentiment around US LNG.
We expect the EIA to report a crude inventory draw of 0.8MM bbl for the week ended 3/29, roughly in line with consensus’ 0.7MM bbl draw. We assume essentially flat imports and exports on the week, with refinery runs down slightly. After the EIA swung its supply adjustment back into positive territory for the prior week, we assume zero for the adjustment factor. Flat production with zero supply adjustment ends up yielding a modest draw vs the prior week’s 2.8mm bbl build which stemmed from the +0.5MM bpd supply adjustment.
XOM VP of IR hosted a Downstream presentation, with materials from a recent investor conference. While 1Q19 contains several headwinds, margins have already improved and the company’s long-term focus on downstream value creation – primarily through yield enhancement projects and lubricants sales growth – remains intact.
We expect the EIA to report a crude inventory draw of 2.9MM bbl for the week ended 3/22/19, above consensus’ 0.9MM bbl draw. Disruption in the Gulf of Mexico could result in lower imports and exports w/w, although most of the delta in crude draw w/w is due to refinery downtime. We adjust production -600 kb/d as we see a high likelihood that the DOE is overstating production and the trend of negative “adjustments” in weekly reports will continue.
We are moving this weekly to Tuesdays at noon to improve EIA preview accuracy and because there was no significance to Mondays with respect to international data. Since the inception of this EIA forecast, the WR estimate has been closer to EIA actuals vs consensus 7 of 13 weeks. Generally, we believe the OPEC data has been more predictive of oil price direction than EIA trends, but we believe the EIA forecast adds nuance to the global supply/demand picture.
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