Improving Oil Fundamentals Overshadowed By All The Attention On Bloated Inventories

BMO Capital Markets analyst Daniel Boyd believes that improving fundamentals for U.S. onshore oil stocks are being masked by inflated U.S. inventories.

The analyst is “tactically bullish” on Halliburton Company HAL, RPC, Inc. RES, and C&J Energy Services Inc CJ, but remains cautious on offshore and sees a downside risk to international expectations.

OPEC Imports

OPEC’s production cuts seem to be driving inventories overseas lower, but bloated U.S. inventories, making up 70 to 75 percent of OECD excess, are overshadowing this.

OPEC imports seem to be declining, but the analyst sees potential for the cartel to keep the U.S. well supplied as part of an effort to push W&T Offshore, Inc. WTI to a larger discount compared to Brent crude BNO.

Forty to 45 percent of U.S. imports are from OPEC, a 12 percent increase year-over-year. This stands to benefit OPEC, as it lowers U.S. production growth and allowed OPEC to sell at higher prices.

Boyd believes it will be up to the U.S. to reduce excess inventory through exports and reduced imports.

The U.S. is drawing against the five-year average, but second-half 2017 comps require an additional 500,000 barrels per day and a net-import decline by over 750,000 barrels per day to eliminate excess inventories by first-half 2018.

“We continue to expect OECD inventories to reach normal levels in 1H18, assuming that OPEC cuts are maintained,” said Boyd.

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