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Expect Much Tighter Oil Markets

Matt Smith

As oil prices hover close to multi-year highs, Saudi's Oil Minister has hit the wires saying that OPEC 'shouldn't be complacent and listen to some of the noise such as mission accomplished' . Just as we learned earlier in this economic cycle via 'don't fight the Fed', we too should take heed: 'Don't fight the Falih'.

Year-to-date, U.S. crude inventories have risen by 3 million barrels, compared to 53 million barrels for the same period last year. Our seasonal Q1 build has been distinctly errant.

While a number of factors can be assigned for such a lack of upward trajectory (higher exports, stronger refinery runs, lower waterborne imports), the slashing of crude flows to the U.S. from Saudi Arabia has also played a part. Saudi crude deliveries were down over 50 million barrels year-on-year in Q1, a third consecutive quarter of considerably lower year-on-year imports.

The aforementioned combo of higher exports, stronger refinery runs and lower waterborne imports have colluded to leave Q1 U.S. crude inventories 110 million barrels lower than end-March last year. (Granted, this is from a high-water mark indeed - the absolute record of U.S. crude inventories at 535.54 million barrels, but hey).

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In 2017, Saudi crude deliveries to the U.S. dropped by 160,000 bpd versus the prior year. Meanwhile, total OPEC deliveries to U.S. shores in both 2016 and 2017 averaged ~3.2 million barrels per day, with imports last year really strong in the first half of the year, before taking a dive in the second half (hark, below).

In Q1 of this year, OPEC deliveries averaged close to 2.7 million bpd, down nearly 20 percent on year-ago levels and the lowest quarter since Q3 2015. This is both a combination of OPEC reining in supplies, and a lesser need from U.S. refiners for OPEC barrels, as they lean as heavy as they can on soaking up rising domestic production.

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The strength in OPEC flows into the U.S. early last year is indicative of the broader strength in total OPEC exports. Through the first seven months of 2017, OPEC on the aggregate had only taken ~60 million barrels off the market versus the October 2016 reference level.

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In Q3 and Q4, however, they knuckled down, closing out the year having removed the best part of 200 million barrels off the market. This was not only driven by lower Saudi exports, but also by compliance from the likes of Kuwait, and amid production struggles of Venezuela, Angola and Iran.

The trend has continued with gusto through the first quarter of 2018, closing in on 250 million barrels - helping to illustrate why OPEC's goal of lowering inventories to the five-year average is now within its grasp.

Given ongoing rhetoric from Khalid al-Falih about 'not becoming complacent', we should expect the market to continue to tighten, with Saudi maintaining its grip.

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By Matt Smith

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