Underlying figures and additional commentary inside. Overall oil market takeaways are neutral. Still no change in the East/West AG OPEC export trends which should keep US imports low, notwithstanding this week’s upward mean reversion. Iran exports are suppressing overall AG OPEC exports, however Russia and Brazil remain an offset with added seaborne supply.
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We believe a data driven approach can clarify OPEC priorities and intentions because the data we use is a proxy for the data they use, and we can thus attempt to infer their conclusions and objectives. We believe recent data points suggest that Saudi Arabia is likely to continue to curtail production aggressively through year end, however there are signals that the production quota might lose efficacy in 2020, and that OPEC+ could fail to agree on the correct approach, endangering coordination. Three risks are emerging signifying vulnerability of existing OPEC+ policy.
We are positive on Refining broadly, and our Outperform ratings are concentrated around companies making logistics investments to optimize refining operations. This typically describes large caps with more capital flexibility (VLO, MPC, PSX), but also includes DK. Yesterday, PSX FID’d two pipelines and continues a theme of Midstream investments bringing feedstock flexibility to refining assets, arguably a more core long-term investment case for the space than valuation-based upside ahead of IMO 2020.
Year to date, EIA reported US commercial crude inventories are up ~41MM bbl. The cumulative supply “adjustment” reported in the EIA’s weekly balance sheet is +46MM bbl. Historically, the supply adjustment was an error term used to correct anomalies in import/export timing, refinery runs, or one-off production adjustments. Now, the adjustment embeds significant production trends dislocated from rig count-based models. In all probability, the EIA will never fix the issue, and so what follows in this paper is a dive into “adjustment factor” trends and analysis of data-driven leading indicators to help mitigate the unpredictability of weekly EIA forecasts and reports.
We expect the EIA to report a 2.6MM bbl crude inventory build for the week ended 5/31. This compares unfavorably to consensus’ 1.4MM bbl draw. Our number assumes a large increase in imports and essentially flat exports w/w, offset partially by an uptick in refinery runs. Lastly, we add the trailing 4-week average supply adjustment (+0.4MM bpd, +3.1MM bbl for the week).
We expect the EIA to report a 1.4MM bbl crude inventory draw for the week ended 5/24. This is slightly stronger than consensus’ 0.7MM bbl draw. Our number assumes moderately lower net imports and stronger refinery runs w/w, plus we are incorporating the trailing 4-week average supply adjustment (+0.4MM bpd).
Refiners in Risk-Off Mode but IMO 2020 Continues to Creep into Physical Commodity Markets – Refining equities have been under pressure with the rest of the energy sector, but positive data points with respect to IMO 2020 continue to emerge. Most recently, Argus reported a sale of 0.5% sulfur (IMO 2020 compliant) bunker fuel off the East Coast of Russia for $550/ton. The report indicates the blender that produced the fuel likely sourced feedstock from multiple Russian refineries and could potentially have the capacity to produce 10,000 metric tons of similar fuel per month.
We refresh our 2019 global oil supply view after 1Q19 US E&P updates and ex-US supply trends visible in ClipperData. The US component now implies US exit-exit production growth in 2019 between 0.9MM and 1.1MM bpd, vs 0.8-1.0MM bpd from our previous calculation. Year-to-date strength in oil prices remains driven on the supply side by US E&P and OPEC discipline in tandem – US E&P earnings season was thus constructive for oil prices as we approach the physical market upside catalyst in 2020: higher demand for light/sweet crude by refineries seeking to reduce fuel oil production for IMO 2020.
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