Crude Inventories Fall as Draws Outpace Production, Goldman Sachs Update Predictions

US stockpiles of oil are falling more rapidly than expected, according to recent inventory data from the Energy Information Administration (EIA).

Data for the week ending February 23 showed inventories at 0.56m barrels when analysts had forecast them to be at 3.47m -  a considerable undershoot, and sign that demand outstripped supply during the week.

The data appears to support the claim made by strategists at Goldman Sachs that data will show rising demand during the first half of 2017 which will verify the recent surge in oil prices based on heightened speculation of the impact of OPEC supply cuts and positive survey data.

As a result, Goldman Sachs’ Jeffrey Currie argues Oil will probably enter a “holding pattern” as markets await confirmation of most recent leg up and inventory draws from OPEC supply cuts.

With global GDP running at 4.4%, which is well above forecasts of 3.7%, the outlook is positive for commodities in general, although more for metals than oil due to the impact of shale operators coming online as prices rise and discarded wells become financial feasible again.

Current prices (spot) have to be above forward contract prices to signal a real draw on stockpiles and inventories is underway, otherwise there is more profit to be realised from storing oil for a later day when prices are expected to be higher.

The trend is towards a rise in spot prices in relation to forward prices as the spread has gone from $-0.67/bbl at the start of the year to $-0.09/bbl now.

Goldman Sachs are confident real activity will rise because:

a) high US inventories are not representative due to the US always being the last to see them draw,

b) China credit tightening is less relevant since commodities do not require mortgages,

c) the linkage between survey data which is positive for demand and real activity is very strong.

Whilst supply cuts by Gulf states and Russia have exceeded expectations they have been offset by diminishing demand from India and US gasoline distributors, however, these factors are seen as only temporary with data in January already suggesting a rebound in Asian demand.

“Beginning with India, the recent oil demand weakness was first and foremost the result of very strong demand growth a year ago, which made the comparisons very difficult," says Goldman’s Jeffrey Currie in a note to clients dated February 21. "Yes, the demonetisation has likely acted as a headwind as well, but the impact on the overall economy appears to be limited with activity indicators such as car sales suggesting a growing economy in January again after a lull in December."

Currie argues further that Asian oil demand growth ended 2016 on a very strong note, with continued strong petrochemical margins pointing to such demand strength continuing in 2017.

"While the Chinese New Year reduces the availability of oil demand data for China, net crude and petroleum imports in January were up 21%yoy,” says Currie.

US Shale

Increased production from US Shale operators is above the expected level lower future price expectations.

Nevertheless, Goldman’s overall global demand estimates still offset higher US supply from more shale coming online.

“This faster ramp up leads us to raise our US production growth expectations for 2017 by 0.2 mb/d with an exit yoy growth rate of 0.8 mb/d. Importantly, we view this higher supply as fully offset by a higher level of oil demand. Specifically, demand growth surprised to the upside late last year with 2016 demand growth now pegged at 1.7 mb/d vs. our 1.5 mb/d expectation from just two months ago. Given our unchanged 1.5 mb/d growth forecast for 2017, this higher base demand level should fully offset higher US output,” notes Currie.

Goldman’s see commodity demand increasing in the 2017 Q2 as current macro economic data corresponds in their view to the early growth phase of the business cycle, “where high demand levels in relation to supply cause resource scarcity.”

Chinese Credit tightening may cause a fall in demand towards the end of 2017 but in Q2 Goldman see demand remaining robust as, “follow through from the recent December/January credit boom is likely to support commodity demand regardless of policy through the end of 2Q17.”

WTI Forecasts

Goldman Sachs forecast that inventories will continue to decline driven by the combination of production cuts and the strong demand growth. 

They reiterate their outlook for WTI prices to rise to $57.50/bbl in 2Q17 before declining to $55/bbl for the rest of the year.

Brent crude prices are forecast to trade at $59/bbl in the second quarter, $57/bbl in 6 months and $58/bbl in 12 months.