US imports from Opec up 21 per cent

The oil market is well aware that Opec set a production ceiling at its meeting on November 30th of 32.5 million barrels per day. But based on comments to a recent article I wrote, there is a lot of confusion about how that ceiling applies.

A news story said, “Opec production dropped to 33.09 million barrels per day in December from 34.2 the previous month.” This is a misunderstanding of the situation.

In particular, there is an issue about Indonesia. At the meeting, this member decided to suspend its membership in Opec. As Opec’s only net importer of oil, it could not agree to join the group in agreeing to limit its output, which is understandable. It could have signed the agreement anyway, as I believe some countries may have, not intending to honour the agreement, but it did not. To me, that reflects integrity.

But less than two months later, there is confusion about the ceiling. To clarify, Opec included Indonesia’s production in the ceiling, even though it had suspended its membership in Opec. I suppose that happened because the deal was negotiated on the day of the meeting, and there was a certain amount of chaos.

“Indonesia is in it, at the October level.” According to Opec’s December Monthly Oil Market Report, Indonesia’s production level was 750,000 b/d.

In Opec’s most recent MOMR, Opec reported its production at 33.085 million barrels per day. But Indonesia’s production is no longer included. One might get the impression that Opec’s production is getting closer to its 32.5 ceiling. But if Indonesia’s production is included, estimated to be 730,000 b/d by the Energy Information Administration (EIA), then the Opec-14 actually produced 33.8 in December.

If Opec is going to quote its output without Indonesia, which seems appropriate, it should clarify its ceiling without Indonesia. And that would be 32.5 minus 0.7, which is 31.8. And so the December volume is actually 1.3 million barrels above that ceiling.

[Robert Boslego – Seeking Alpha] AFTER four weeks of huge builds and draws we finally get a tame number this week with a 2.0m bbl draw in total petroleum stocks. I know other analysts focus primarily on crude stocks, but personally I think the most important number is the change in total petroleum inventories. At the end of the day, what matters most is how much petroleum is burned by consumers compared to how much is pumped out of the ground. Splitting hydrocarbon molecules and moving them from the crude tank to a product tank doesn’t materially affect that equation in most circumstances, and certainly not now with inventories of just about everything well above normal.

With that said, the internals of this report were pretty interesting with a very large 7.4m bbl drop in propane inventories being mostly offset by a 6m bbl increase in gasoline stocks with smaller off movements in the remaining categories. On the consumption front we saw large increases in distillate and other oils offset by a curious decline in gasoline where demand for the week was the lowest in nearly 3 years, and 7.1m bbls below the same week last year.

Total petroleum stocks decreased 2.0M bbls for the week which is the right direction but still a little shy of the rate bulls really need to resume their march towards $60. It’s still a bit early for the Opec/non-Opec cuts to start hitting US inventories, but in 3-4 weeks we should start seeing a noticeable dip in crude imports from about -53m bbls a week hopefully down to under 50m bbls a week, and total stock draws in the ballpark of 3m-5m bbls a week.

It won’t happen overnight but if those pieces fall into place we could start seeing actual year over year declines in petroleum stocks for the first time in two and a half years.

The draw in itself is a little bullish, but not too concerning for the bear case. Imports remain high and we have yet to see any drop off related to the Opec/ non-Opec cuts, not that we really expected them before February (if at all). Looking to other sources, Canadian imports are coming in strong at -3.5m bbls a day which is 200-300 thousand barrels a day higher than this time last year. Add that to the recent gains in US production and it is possible that the Opec/non-Opec cuts will be too little too late to draw down US inventories at any respectable rate.

Finally, as I have mentioned in the past I continue to keep an eye on consumption, especially gasoline. The chart above shows the trailing 52 week average daily consumption rate peaking the first week of October 2016 and slowly falling since then. It’s not a big number, down just 0.5 per cent, but it’s going on 4 months and it seems to be accelerating.

If you were expecting 2-3 per cent growth in 2017 this trend could undercut your full year gasoline consumption number by about 100m bbls. It’s a bit early for the bears to get overly excited, but boomers are retiring, vehicles are getting more efficient, and the younger generation seems much less interested in driving, so this is definitely a trend worth keeping an eye on.

This was a neutral report with the slightly bullish inventory decline being offset by bearish imports , solid domestic production, and general weakness in gasoline consumption. Oil seems fairly valued at -$51 and nothing in this report materially changes that for me. For the next 3-4 reports, all eyes should be on Opec.

They promised cuts on Jan 1, 2017, and continue to assure everyone they are for real. Transporting oil takes time, so if they are for real, we should see the cuts sometime in February. It’s a bit early, but I put together a new chart to show where Opec Imports are compared to the 2016 average.

The 2016 numbers are the average daily imports of crude from the listed Opec countries for the full year. The 2017 values are the daily average of the two weekly reports we have had so far. Clearly, Opec did not decide to get an early start on cutting exports to the US, with the 2017 total currently 557k bbl/day higher than the 2016 rate. [Scott Anderson – Seeking Alpha]