Yesterday we all wanted to focus on the stock levels of crude, distillate, and gasoline; however, the story continues to be the soaring U.S. crude production and here is why.
U.S. production added 25,000 barrels per day last week, bringing the production total to 9.707 million barrels per day. This is just over 1 million barrels per day more than last year. There are two main components as to why this is happening.
First, the price of January WTI has been over $50/barrel for over two months. This has given a chance for producers to hedge going out 12-24 months on the relatively flat price curve to lock in sales prices at fairly healthy levels compared to the past three years.
Second, and perhaps the most important, is the February Brent to WTI spread last traded at $5.40/barrel (pictured below). This incentivizes U.S. producers to export their barrels to Europe, Asia, and South America and to be paid more for it than if they sell to U.S. domestic refiners. This spread has consistently stayed wide for a good portion of the year because of OPEC’s production cuts, providing less crude oil in the international market which allows the U.S. crude to capture market share and be paid well for it.
The one variable that could change this tide right now is Russia. Russia has expressed its concerns that since OPEC agreed to cut production until the end of 2018, it could create a spike in U.S. production and we’re starting to see it. The producers are set to review the deal’s progress at its meeting in June. This will allow U.S. crude production to potentially flourish in that time span and may cause Russia to cry uncle and ramp production back up because it believes Brent at $60/barrel is too high.
January WTI currently trades up $0.68 to $56.64/barrel, RBOB is higher by $0.0283 to $1.6892/gallon and ULSD is up $0.0307 to $1.8920/gallon.