A potential trade war between the US and China could threaten global oil demand and even target US crude exports, curbing flows that are needed to absorb booming US shale production and limit inventory builds.
US crude stocks typically build this time of year
US propane exports to China at risk
LOOP Sour at $1.49/b discount to Dubai, CFR North Asia
That would mark a turnaround, as stocks have tightened relative to the five-year average since in mid-September, falling to a deficit the last three weeks, Energy Information Administration data shows.
The amount of crude in storage equaled 425.33 million barrels the week that ended March 30, less than 1 million barrels above the level at the end of 2017.
That is unusual because crude stocks typically build sharply the first three months of the calendar year. For the same period, stocks increased 56.5 million barrels in 2017 and by 50.1 million barrels on average from 2013-17.
Analysts surveyed Monday by S&P Global Platts expect crude stocks built 100,000 barrels last week. The five-year average shows a build of 1.9 million barrels.
Inventories sit at the lowest level for this time of year since 2014, even though US production has exploded.
The latest EIA weekly estimates pegged output at 10.46 million b/d, a year-on-year increase of 1.2 million b/d.
Elevated exports have allowed US production to skyrocket without the corresponding build in storage levels.
US crude exports have averaged 1.52 million b/d year to date, about double the level for the same period a year ago.
Exports were 2.175 million b/d the week ending March 30, beating the previous record high set the week late October at 2.133 million b/d.
In this environment, an escalation between Washington and Beijing over trade casts a large shadow in both direct and indirect terms.
For example, China could slap tariffs on imports of US crude oil. The erection of trade barriers would likely disrupt strengthening commercial ties, but a similar situation didn't stop China from announcing plans to raise the duty on imports of US propane to 26% from 1%.
The US provided one-quarter of China's total propane imports in the first two months of 2018, becoming its top supplier.
Chinese refiners have been attracted to WTI-based grades because of an open arbitrage and desire to diversify supply. The second VLCC to load crude directly from the Louisiana Offshore Oil Port departed March 25 and was tracked heading to the port of Shanghai, China, according to cFlow, S&P Global Platts trade flow software.
LOOP Sour moved to a $1.49/b discount to Dubai, both CFR North Asia, Monday, down from parity in late-March, Platts data shows. STRONG REFINERY DEMAND
Otherwise, the biggest risk from mounting trade barriers comes from reduced global oil demand as a result of more sluggish economic growth.
Robust export markets are needed given domestic crude production. An uptick in seasonal refinery demand will also help absorb supply this spring and summer.
That process already looks underway. US refinery utilization has increased the last five weeks, averaging 93% of capacity the week that ended March 30.
Analysts are looking for an increase last week of 0.2 percentage point to 93.2%, which, if confirmed, would exceed the year-ago rate of 91%.
Despite an expected rise in utilization, analysts are looking for gasoline and distillate stocks to have declined last week by 2 million barrels and 1.2 million barrels, respectively.
Refiners have been running relatively hard of late. Crude runs have averaged 16.56 million b/d the last five weeks, compared with 15.88 million b/d in 2017 and 15.42 million b/d on average from 2013-17.
Gulf Coast refinery utilization averaged 94.3% of capacity the week ending March 30, its highest level since the week that ended January 12.
CRUDE DIFFERENTIALS SHIFT
Crude price differentials have encouraged crude flows to the Gulf Coast from the Permian Basin, yet the sheer volume of supply coming from the major shale play again threatens to exceed local pipeline capacity.
Output from the Permian Basin is projected to grow 1.2 million b/d in 2018 over 2017, reaching 3.9 million b/d by this December, according to S&P Global Platts Analytics.
Producers even are considering the more expensive option of using trucks and trains to move barrels until pipeline space opens.
The spread for WTI MEH -- representing WTI Midland crude at the Magellan East Houston Terminal -- and WTI Midland has widened since late March.
That spread reached $8/b last week, the biggest gap between Permian and Houston prices since Platts began assessing WTI MEH in February 2015.
In a similar vein, Brent and Dubai crude prices have both strengthened relative to WTI the last few weeks, sending a price signal for US producers to seek customers abroad.
WTI for second-month delivery has been at a discount to front-month Dubai since March 26. That spread was minus $3.24/b Friday, the biggest plunge into negative territory since January 16.
The Brent/WTI spread is back above $5/b after having narrowed to about $3/b at the start of March.
