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Extract from crude oil:
Oil crude stocks fell by a whopping 9.5 mb to 459 mb, driven by 6.8 mb fall in PADD 3 inventories, as exports climbed back to 3 mb/d and US runs rose to 17.4 mb/d. The draw compares to a seasonal weekly decline of 1.8 mb, reducing the overhang to the five-year average to below 27 mb, from 36.5 mb three weeks ago. As we had posited a few weeks ago, the rally in Mars structure had suggested steep draws from mid-June onwards, and given the strength in Aug-19 Mars, USGC crude draws are likely to continue through next month as refineries ramp up runs.
WTI timespreads have strengthened sharply over the past few weeks on anticipation that the imminent start-up of the Permian pipelines will divert volumes from Cushing. While we remain structurally constructive on WTI, recent developments may stall further WTI rallies for now. North of Cushing, flows on Flanagan South into Cushing have yet to fall materially even after the completion of Joliet refinery maintenance. Meanwhile, in Group 3, the 70 thousand b/d Tulsa East plant encountered an unplanned outage, which could reduce Cushing draws. Across the Atlantic, a combination of surplus crudes from PES’s Philadelphia refinery closure and other East Coast FCC issues, a WAF overhang from slower Asian buying, and the partial restoration of the Druzhba pipeline have weighed on Dated Brent. This has narrowed the premium Ekofisk commands over WTI, a key metric for measuring USGC export arbitrage. Consequently, WTI-Houston has fallen closer to $4 per barrel over WTI for August trading—a level that is still slightly open on both Marketlink and Seaway for Aframax-sized volumes from Cushing, but slightly closed if DSW pricing is used. Heavy crude arbitrage from the Midwest into Houston is firmly closed and could reduce outbound flows from Cushing if such levels persist. If one values a DSW barrel versus a foreign barrel at a location like Lake Charles, WTI is still advantaged to the foreign alternative, but that advantage has certainly narrowed, which dents one of the bullish components for WTI. That said, Enterprise has issued a lower tariff effective 1 August for Seaway, reducing it to $3.50, opening the arb to the USGC even against DSW. Marketlink may follow suit.
Extract from oil products:
US gasoline inventories fell by 1.5 mb w/w due to a 2.9 mb w/w drop in PADD 3 inventories offsetting builds in PADDs 1 and 2. PADD 1 stocks rose by 0.7 mb w/w as imports jumped to 0.87 mb/d from less than 0.54 mb/d a week earlier. PADD 1 gasoline imports will need to stay elevated, however, as the shutdown of the 0.35 mb/d PES refinery will increase year-round import requirements by at least 0.1 mb/d. The refinery will operate some of its units to run down crude stocks but is on track to be completely shut by the end of August. We do not expect the plant to restart either of its two FCCs during this final phase of operations. That said, gasoline imports into the USEC should get a boost as Irving Oil is restarting a 35 thousand b/d reformer that has been shut since October 2018 following a fire, which will boost octane production at the Irving refinery, which is the single biggest source of gasoline imports for the USEC.