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.
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.
After months of wide dispersion, gasoline cracks have crossed those of distillate to the upside amid several unplanned refinery outages in the US across all geographies. Higher gasoline cracks should support industry margins overall, as refineries can shift back to gasoline production following prolonged max-diesel production signals, which could further support diesel supply/demand balance.
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.
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.
While investor sentiment seems focused on weak gasoline margins from 1Q, and even potential risk to 2Q19 refiner estimates as a result of a perceived massive gasoline supply overhang, we note that current 2-1-1 crack spreads across multiple regions are close to or above year ago levels. On 4Q18 conference calls, refining managements near-universally predicted refined product oversupply to clear up as maintenance season progressed and seasonal demand accelerated. Those predictions have played out, and we believe refining stocks can maintain momentum as sentiment for 2Q improves. See inside this note for charts of y/y 2-1-1 crack spread performance for various crude grades and regional refined products since the beginning of 4Q18. All quotes below are as of 3/18/19 close. Reiterate Outperform on PSX, MPC, DK, and recently upgraded VLO.
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.
At a management meeting hosted by RDS yesterday updating its Integrated Gas and New Energies segments (see note HERE), we gleaned a positive takeaway for refining: with respect to IMO 2020 implementation, sulfur scrubbers on vessels may not be a long term solution, as units produce waste with no current disposal outlet, and could be a net negative for the environment. The comment referred to the growing LNG-for-maritime-fuel market, however the nearer term implication could be lower than expected fuel oil demand post-IMO 2020, supporting the outlook for distillate margins and light/heavy crude differentials.
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