On the 1st of January in my prior article "Another Side of the Crude Oil Market Narrative", I outlined a contrarian view as to why crude oil price will rise in '19 despite the gloom and doom projections emanating from deteriorating demand and oversupply globally. In this article, I aim to provide a quarterly update while seeking for constructive feedbacks from experienced investors here.

On the August 31st '18, U.S. crude oil inventory was 18 mil. barrels below its 5-year moving average, resulting in bullish projection for crude oil price to even cross the US$100 per barrel threshold. Little did we know that by November 30th '18, this bullish inventory setting reversed with U.S. crude oil inventory at 18 mil. barrels above its 5-year moving average, further propelling the downturn in crude oil prices as the supposedly eliminated Iranian barrels are suddenly retained when Trump granted import waivers. In contrary to the prevailing consensus that weak demand with ample supply resulted in inventory build, my thesis stood firmly on the belief that the bearish inventory figure was the result of Saudi Arabia ramping up crude oil export to U.S. as an exchange for the full-sanction of Iran through Trump. As expected, U.S. crude oil inventory started stabilizing in January (a month after OPEC+ cut was enacted) as Saudi Arabia slashed crude oil export to U.S. from 1 mil. bpd at the end of September '18 to 450,000 bpd at the end of March '19. Having said that, the natural question would then be why haven't inventory declined significantly if Saudi Arabia already cut its U.S. exports so aggressively? Afterall, logistics would take approximately 60 ~ 120 days. My simplest answer lies in U.S. refinery maintenance.

Speaking of U.S. refinery maintenance, I want to touch on two aspects namely maintenance rescheduling and recovering crack spread. In '19, U.S. refineries frontloaded their maintenance to Q1 from Q3 and Q4. To give you a perspective, U.S. refineries took off 2.1 mil. bpd in '19 March compared to 1.15 mil. bpd in '18 March for maintenance purposes, a figure almost 2x higher YoY. The natural question would then be why U.S. refineries frontloaded their refinery maintenance schedule. In 18Q4, crude oil prices were rising too quickly while gasoline prices in U.S. failed to keep up especially entering into the winter season when driving activities tend to be softer. As a result, growing gasoline inventory as a result of record-high production rate in the summer of '18 moved gasoline crack spread to negatives. Consequently, some refineries decided to start its maintenance activities approaching year end since it is economically unprofitable to crack. More importantly, major refineries decided to frontload their maintenance schedule to fully prepare themselves to capitalize on the upcoming IMO 2020 implementation. As the production of gasoline and distillates declined in 19Q1 due to the maintenance, both gasoline and distillate inventories declined below their 5-year moving averages. Recently, gasoline crack spread strongly rebounded from being range-bounded between -$1 ~ $1 per barrel in 18Q4 to $11.60 in March '19. As we enter seasonal demand peak period in U.S., strong demand pull into declining gasoline inventory that translates to higher retail gasoline price will incentivize refineries to jack-up their utilization rate. With 19Q2 ~ 19Q3 well supported by peak driving season and 19Q4 experiencing a bumper demand due to IMO 2020, I am confident U.S. crude storage can decline by 100 mil. barrels from Jan '19 to Dec '19. 

Going onto the general supply picture, I want to briefly mention U.S. shale and Brazilian supply. With crude oil prices crashing in 18Q4 when crude oil producers prepare their capital budgets, major U.S. oil servicing companies expect a 10% ~ 20% decline in capex budget in North America. Moreover, rising interest rate and drying energy high yield bond market are causing shale oil producers to prioritize economic return over cash-burning production growth. As of March '19, it appears that U.S. rig counts are plateauing at ~1,000. This is especially detrimental for North American shale oil producers as shale oil wells have a much higher decline rate. Moreover, year-to-date production figures demonstrated a slowdown in two major basins namely Bakken and Eagle Ford. I do not want to speculate on the exact reasons aside from my aforementioned deterioration in acreage quality in my previous thesis. To be conservative, I still expect U.S. crude oil production to grow YoY because the world needs every drop of oil it can supply. This is because Brazil was expected by the market to be the non-OPEC second largest supply growth source but a growing disappointment is imminent. In '18, the average supply growth expectation in Brazil was 700,000 bpd in '19. In March '19, the IEA continued revising downwards the supply growth by 70,000 bpd. Effectively, IEA's expectation for Brazil's supply growth almost halved to 420,000 bpd as of March '19. Even this figure in my opinion is difficult to achieve for reasons I will outline in future articles.

In summary. I am projecting for U.S. crude oil inventory to decline significantly beginning from April heading into year end and serve as a strong upward catalyst for crude oil price. My projection is based on Saudi Arabia cutting exports into seasonal demand peak period, record high refinery utilization rate in the rest of '19 and a deteriorating supply growth outlook in U.S. shale and Brazilian supply. 

I hope I am able to learn the wisdoms of everyone here.