Feeding Commodities: Robust US Oil Demand

Energy

Yesterday was a rough day for the oil market. Prices were under pressure for much of the day as Iran nuclear talks continued. However, a constructive EIA report was enough to see the market rally and settle higher on the day.

The EIA reported that US crude oil inventories fell by 4.76 million barrels over the past week, leaving total US crude oil commercial inventories at just over 410 million barrels – the lowest level since 2018. The draw during the week was also larger than the reported 2.03 million barrels. by the API the day before. The larger call was mainly trade-driven, with crude oil imports falling by 696 mb/d, while crude oil exports rose by 724 mb/d to 3.1 mb/d in course of the week. Refiners also increased their utilization rate by 1.5 percentage points to 88.2% (although in the next report we could very well see a drop in refining operations due to the recent winter storm in Texas ).

Cushing’s crude oil inventories also continued to decline slightly, dropping 2.8 million barrels to just 27.7 million barrels. We are entering a territory where we will worry about hitting the bottom of the reservoirs. The narrowness of the WTI delivery hub was reflected in the rapid WTI time spread. The spread briefly topped US$2 a barrel earlier this month – the first time since 2018. Declines were also seen in refined products. Gasoline and distillate fuel inventories decreased by 1.64 million barrels and 930 million barrels respectively. As a result, total commercial inventories of U.S. oil and products fell by 8.05 million barrels, leaving them at their lowest levels since 2015.

The US demand story is also constructive. The 4-week average of total product supplied (implied demand) reached a record high of 21.91 million bbl/d last week, surpassing the previous record of 21.72 million bbl/d seen in 2019.

As for today’s timing, OPEC will release its monthly market report, which will include January production numbers for the group and OPEC’s outlook for non-OPEC supply and global oil demand for the rest of this year.

Metals

The metals complex was buoyant yesterday amid growing risk appetite and a weaker dollar ahead of the US CPI release on Thursday. Aluminum LME led the gains as traders digest details of supply disruptions from China’s Guangxi Autonomous Region following a Covid outbreak. 3M Aluminum reached a high of US$3,272/t, approaching record highs of US$3,380/t seen in July 2008.

However, iron ore has been hurt by speculative sentiment over demand optimism and possible intervention from Chinese policymakers, who have repeatedly called for stable prices. The most active contract trading on the SGX fell to a low of US$143.85/t yesterday, after trading at a high of US$153/t the previous day. The National Development and Reform Commission (NDRC) has repeatedly affirmed that it will propose measures to suppress speculation. In addition, reports indicate that the government has summoned information providers for disclosing erroneous prices.

Agriculture

USDA’s monthly WASDE report was largely constructive for the soybean market as the agency revised down 2021/22 closing stocks for the US and global market. That said, the market was expecting even larger downward revisions to these estimates. The USDA lowered its estimate of US ending stocks to 325 million bushels from an earlier estimate of 350 million bushels. This was due to higher domestic demand. For the global market, the agency revised production estimates down to around 8.7 million tonnes with significant downward revisions in Brazil (-5 million tonnes), Argentina (-1, 5 million tons) and in Paraguay (-1.8 million tons). The agency also revised demand estimates down by around 5.8 million tonnes, mainly due to weaker demand from China (-3 million tonnes). Overall, global stock estimates at the end of 2021/22 have been revised down from 95.2 million tonnes to 92.8 million tonnes. The market expected a figure closer to 91.4 million tonnes.

For corn, the USDA left the national balance sheet largely unchanged with production and inventory estimates at around 15.12 billion bushels and 1.54 billion bushels respectively for 2021/22, as of last month. Globally, the agency revised down stock estimates from 303.1 mt to 302.2 mt, due to lower supply estimates from Brazil (-1 mt). The market expected a closing stock closer to 299.5 million tonnes.

For wheat, the USDA raised national ending stock estimates by 20 million bushels to 648 million bushels due to lower demand. Overall, the report was more constructive as 2021/22 ending stock estimates were revised down from 280 to 278.2 million tonnes. Global production was revised down by around 2.2 million tonnes, while global demand increased by around 0.6 million tonnes.

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Felix J. Dixon