Courtesy of Leonard Brecken of OilPrice.com
Last week we saw another 10MB massive crude oil build domestically at a time when US production is flattening, refinery capacity is rising and gasoline demand is growing (5% year over year vs. 3% or lower in the recent past). This divergence can be explained in part from the rising import of heavier oil which accounted for 6.1MB (869,000 B/D) of the 10MB build last week. Imports for the week rose a whopping 6.5% sequentially and 8.5% vs. the 4 week moving average! Once again the chase to create sensationalistic headlines to drive down oil is self-evident as US production rose a meager 14,000B/D and was not the main cause of the rise. So why, month after month since 2014, have imports risen when there exists a “glut” in US oil inventories?
In 2014 according to the EIA, API Gravity (the weight of oil) steadily increased and rose 2.84% which is very significant in adding to the oversupply of US oil. In January 2015 that number rose to nearly 3.1% year over year, according to the latest data point we have from the EIA. Given the recent surge in imports last week the bet it has risen even more.
Source: EIA (Click Image To Enlarge)
Imports generally have a higher API vs. US lighter produced oil. If refinery capacity is skewed towards processing heavy imported oil vs. lighter US produced oil, as demand rises you will, as a result, be short heavy and long light. Not surprisingly this is exactly what occurred the past 6 months as demand is accelerating for gasoline at a time when US production in late 2014 was rising rapidly. This is only natural because refinery capital expenditures haven’t exactly been front and center for the majors given lackluster US gasoline demand and the fact that only until the last 2-3 years did it become evident that US shale would grow to such an extent. Add on regulations and its no wonder US refineries were slow to adjust to the oil mix.
In the next 2 years refineries plan to add 300-400,000 B/D in 2015 and 2016 (3% of daily output) or 125M-130M barrels per year in lighter refining capacity targeting the use of US production vs. imports. That alone will add nearly 2.5MB per week in demand for US oil as an input in the context of stock builds of 10MB recently. It should be noted once again crude oil stock builds occur seasonally until May as a result of refinery maintenance which peaked in February as capacity stands at roughly 90%. Refineries are enjoying record margins so expect that number to rise significantly. That too will assist in reducing oil stock builds as will the 5% year over year gasoline demand as we move towards the seasonally strong driving season.
It is amazing to see the lack of real analysis being done on both Wall Street and in the media especially. In recent weeks the sell side analysts who cover energy have become so complacent that they merely plug in the current strip prices into their earnings models for E&P companies. Not one, except Mike Rothman at Cornerstone Analytics, is questioning the “why?” or “how?” of what is occurring.
The 200 or so players who effectively control the oil futures market have changed behavior and expectations as the oil price curve has collapsed. Prices from late 2016 into 2018 are essentially flat in the low to mid 60s, believe it or not, which would essentially bankrupt most of OPEC, US conventional oil, part of US shale and deep offshore drilling. So ask where is the oil going to come from? Yet the madness continues until investors realize E&P companies need a higher price to justify investments in the space.
