US crude inventories likely down 1.7 million barrels as refiners increase runs

New York — US crude inventories likely fell 1.7 million barrels the week ending May 31, as refiners increased runs while production remained stable, a survey of analysts by S&P Global Platts showed Monday. Crude inventories typically decline heading into the summer as refiners increase runs. Analysts were looking for refiners to increase operations by 0.5 percentage points to 91.7% of capacity, based on last week’s US Energy Information Administration data. However, crude runs likely would have been higher were it not for flooding in the Midwest, which caused operational problems at some refineries, notably HollyFrontier’s 125,000 b/d Tulsa, Oklahoma, plant. Looking forward, US refinery runs are expected to climb to 17.45 million b/d in June, according to S&P Global Platts Analytics. A crude stock draw could also be tempered by healthy supplies. Crude production is expected to remain at roughly 12.3 million b/d, based on last week’s EIA data. US production was up 100,000 b/d the week ending May 24, and up 1.5 million b/d from the same week in 2018. While US rig counts have fallen, output continues to rise, driven by unconventional plays. The Permian Basin has seen a drop of 30 rigs since the beginning of the year, but producers have been tapping into an abundance of drilled but uncompleted wells (DUCs). Permian crude output averaged 4.387 million b/d in May, and is projected to average 4.52 million b/d in July, according to Platts Analytics. Crude prices have fallen in recent weeks, with front-month Cushing WTI down roughly $10/b since May 20. The Midwest flooding also caused Tallgrass the shut the southern leg of its 400,000 b/d Pony Express crude line, which runs from Guernsey, Wyoming, to Cushing, Oklahoma, the WTI delivery and pricing point. The flooding also caused a temporary closure of the 360,000 b/d Ozark Pipeline, which runs from Cushing to Midwest refiners. Considering Midwest refinery demand for crude was lower, Cushing crude inventories likely increased last week. This was reflected in the Cushing WTI discount to Brent, which widened to $11.13/b May 31 from $9.28/b May 24, S&P Global Platts data showed. Crude imports are expected to have risen last week, with US Census data showing increases from Colombia, Brazil and Nigeria. Refining margins are strong throughout the US, and should encourage higher refinery runs and imports. Census data shows more crude from West Africa and Canada entering the US Atlantic Coast last week. While cracking margins show for Bakken railed from North Dakota as more competitive than waterborne grades, rail capacity is limited. Crude exports likely remained high last week. Platts cFlow trade-flow software shows lower crude exports to the Caribbean and Latin America offset by steady exports to Europe, and a jump in exports to Asia, primarily driven by China. However, refining margins in Asia have weakened, and are in some cases negative, which could cause a decline in demand for imported crude down the road if the regional refined products surplus is not cleared. Analysts expect US gasoline inventories to have increased by 208,000 barrels last week, and distillate inventories to have fallen 1.08 million barrels. EIA data for the week ending May 24 showed an unexpected rise in gasoline inventories, and decline in implied demand, which helped push the futures complex lower towards the end of last week. The bulls were looking for signs of a demand increase, considering recent global demand worries stemming from the ongoing US-China trade war. However, the US economy remains strong, and a recovery in implied demand will likely emerge in the EIA data for the week ending May 31, according to Platts Analytics. Economic strength is also bullish for diesel demand. Flooding has likely decreased implied demand for gasoline in the Midwest, but marginally so. Also, while refiners are expected to have increased runs, they have been maximizing diesel production over gasoline. The flooding has delayed plantings, and thus the seasonal increase in Midwest diesel demand. Farmers are expected to increase diesel buying in the coming weeks as they boost activity, although diesel use for farming will likely be below average this year.