Commodities Digest:Drawing down crude oil inventory

　　US crude oil markets are making the most of the refining season, makingconsistent draws on commercial crude oil inventory since mid May. Moreover,we expect the inventory surplus versus the five-year average to also decline,providing a constructive backdrop to crude oil markets.

　　Although our previous projection has been proven too aggressive as it wasbased on higher-than-actual refinery utilization, we continue to expect that theUS crude oil inventory drawdown will average at a weekly rate of -2.88mmbbl/week, considerably higher than the historical average of -1.65mmbbl/week (based on a crude oil import rate of 7.8 mmb/d). Although wesee some risk of slower draws (or small builds) in the next two weeks the rateof weekly drawdown should increase from the start of July and acceleratefurther into August. This would shrink the crude oil inventory surplus from 152mmbbl (above the 2010-14 average) currently to 135 mmbbl at the start ofSeptember.

　　In September and October, however, signs of a strong refinery maintenanceseason may exacerbate seasonal crude oil inventory builds into the end of theyear, even with US total production falling from 8.7 mmb/d currently to 8.2mmb/d at the end of the year. The pivotal variable may well be the rate ofcrude oil imports which typically rises into the summer refining season andthen falls into the end of the year.

　　However, imports have so far resisted the seasonal upward trend, and maytherefore also stay flat into the end of the year at or just below 7.8 mmb/d.

　　This would imply the crude oil storage surplus versus the five-year averagerising from 135 mmbbl in September to 185 mmbbl at the end of the year. Inorder to see further decline in the storage surplus (and hence an increasinglypositive market outlook), crude oil imports would need to fall towards 7.2mmb/d at the end of the year. This would enable a modest further reduction inthe storage surplus in the fourth quarter, down from 135 mmbbl to 123 mmbbl.

　　Unfortunately the level of imports is driven by a number of factors, thecombined effect of which is difficult to ascertain. A tight WTI-Brent spread ishelping to make imports more attractive, with the result that imports fromOPEC countries pushed above 100 mmbbl/month in March, for the first timesince July 2014. Heavy oil imports from Venezuela are on the rise since thestart of the year, and other imports of heavy oil (from Mexico, for example)seem unlikely to decline given Gulf Coast refinery configurations. Lastly thefading contango has probably become tight enough to make even onshorerefinery storage uneconomic, providing only one plausible reason why importsmay moderate. Overall however it is unclear whether this factor on its own willdrive a meaningful decline in import demand. With a steady or only minordecline in the import rate this year, the US crude oil inventory surplus isunlikely to decline further after the end of the summer refining season. Webelieve this situation mirrors the slow pace of the global supply-demandtightening, such that further progress in the oil-price rally will come at a slowerpace in the fourth quarter.