🛢️ What happens with record-high production and record-low inventory?

📊 Record High Production, Record Low Inventory

Key oil market updates to consider this week:

• US oil production hits record high of 13.13 million bpd in Q3
• US Department of Energy Announces SPR Buyback at $79/bbl target
• US SPR at ~40-year low of 350 million barrels
• Cushing, Oklahoma at record low of 21 million barrels (1 MMbbl above min.)
• Venezuela’s 6-month sanctions waiver v. Chinese teapots v. US imports
• US distillate v. gasoline inventory

Brent and WTI notched weekly gains of over 1% but settled lower Friday after Hamas released two US hostages from Gaza.

Friday’s losses signal the broader market’s tunnel vision on the conflict in the Middle East. With tunnel vision comes blind spots and added risk.

Today, we zoom out to bring context to the global crude supply picture, starting with US production and the US-Venezuela sanctions-relief package.

This week, the EIA reported that US crude production set a record of 13.13 million barrels per day in the third quarter. The EIA projects US production will increase again in the fourth quarter to 13.16 million bpd.

On Wednesday, the US and Venezuela struck a 6-month deal to lift restrictions on Venezuelan oil production, exports, and sales.

Will increased US/Venezuelan supplies be enough to overcome the global deficit?

Two factors muddy that argument:

1. Sapped global crude inventories, accelerated by OPEC+ cuts.
2. Venezuela’s limited oil supply, road to recovery, and existing export partners

Sapped Stockpiles

US crude production might be reaching new heights, but so is global oil demand.

And this year, OECD production hasn’t been enough to offset the lost supplies from Western sanctions and OPEC+ cuts.

Before the Israel-Hamas conflict, OPEC published forecasts for rest-of-year crude supply and demand. Those September forecasts showed global crude inventories draining by approximately 3.3 million bpd in 4Q23 – the largest drawdown since 2007.

And that’s after crude and product inventories are already constricted to historic lows.

Global crude stocks in August fell by 102 million barrels to the lowest level since 2017.

US inventories provide a perfect example:

Crude stocks at the Cushing, Oklahoma storage hub for the week ending 10/13 amounted to roughly 21 million barrels. The facility has a minimum operational requirement of 20 million barrels.

While total US crude production is reaching new heights, the EIA’s monthly Drilling Productivity Report released Monday showed that US oil output from top shale basins is forecasted to fall for the third month in November.

The EIA expects a decline in shale crude output to 9.553 million bpd in November from 9.604 million bpd in October.

Key crude notes from the EIA’s Weekly Petroleum Status Report for the week ending 10/13:

• US commercial crude inventories (excl. SPR) decreased by 4.5 MMbbl to 5% below the 5-year seasonal average
• US crude oil refinery inputs averaged 15.4 million bpd
• US crude imports averaged 5.9 million bpd, down 387,000 bpd from the previous week

US SPR Buyback:

This week, the US Department of Energy announced plans to refill the Strategic Petroleum Reserve (SPR) by 6 million barrels with a price target of under $79/bbl.

The DOE aims to purchase crude for delivery in December and January.

With crude futures trading around $90/bbl and a forecasted supply deficit through the remainder of 2023, the DOE’s target purchase price and delivery timeline are questionable.

Product Inventories:

The state of petroleum product stocks paints a more nuanced picture for refiners.

Drained distillate inventories in the US, EU, and Asia picked up pressure from Russia’s diesel export ban last month.

In September, US distillate fuel oil stocks averaged 21 million barrels below the 10-year seasonal average. Europe and Singapore’s distillate inventories were 25 million barrels and 3 million barrels below their respective 10-year average.

And demand shows no signs of slowing down.

Last week, US distillate demand hit its highest level in over a year. US diesel and heating oil exports surged to 6.6 million barrels in September – also the highest in over a year.

On the other hand, bloated US gasoline inventories are eating into refinery margins. Gasoline profit margins are down 83% since August to as low as $7.04/bbl this month.

The US heating oil crack is double the seasonal average at $44/bbl.

According to the EIA’s Weekly Petroleum Status Report for the week ending 10/13: 

• Refineries operated at 86.1% capacity, compared to 90.3% a year ago
• Total motor gasoline inventories decreased by 2.4 MMbbl from last week but remained above the 5-year seasonal avg. 
• Distillate fuel inventories decreased by 3.2 MMbbl to 12% below the 5-year seasonal average

Unlocked Venezuela Supplies? 

The conflict in the Middle East put US sanctions on oil producers Iran and Venezuela in the spotlight. 

Both sanctioned producers established “shadow fleets” to deliver discounted crude to countries like China and India. Still, Monday’s sanctions-relief package formally granted Venezuela a six-month license to export oil freely. 

How does Venezuelan production compare to Iran’s?

Iranian oil output exceeded 3 million bpd this summer, with exports in May estimated at 1.6 million bpd. 

Venezuela’s oil industry, meanwhile, has a longer road to recovery. 

The country’s oil production in 2015 was ~2.4 million bpd. In 2020, it fell to ~374,000 bpd. 

This year, output recovered to ~780,000 bpd – roughly 400,000 bpd of which was imported by Chinese teapot refiners. 

What does the US-Venezuela deal mean for global supplies? 

Venezuelan exports will likely redirect from China to the US, but the odds of meaningfully increasing production to pre-sanctions levels are slim. 

OPEC officials mirrored that sentiment with no plans to adjust production.

The Takeaway: 

Global crude and petroleum product inventories are tight heading into winter. 

Record US production does not relieve the global supply deficit. 

⚡Bonus News Recap:

🔥 EU Considers Gas Price Cap Extension

The European Union is considering extending its February emergency gas price cap in response to the damaged Balticonnector pipeline and evolving Middle East conflict.