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U.S. Crude Oil Inventories Aren't As Bearish As They Seem

The amount of the crude oil inventory build this week was equal to a single day of U.S. crude oil imports.
OECD stocks of crude and products have fallen for five consecutive months

A crude oil storage tank stands beyond a manifold at the Enbridge Inc. Cushing storage terminal in Cushing, Oklahoma. Photographer: Daniel Acker/Bloomberg

Crude oil prices fell more than 5% on Wednesday, which marked the largest single-day drop in more than a year. The sell-off was triggered by the latest Weekly Petroleum Status Report (WPSR) from the Energy Information Administration (EIA). The report showed that U.S. crude oil inventories had risen by 8.2 million barrels over the previous week, to an all-time record high. High crude oil inventories are certainly not bullish news, but a little context is in order.

Refinery maintenance season is currently underway. During this time crude oil demand drops as some refineries service equipment ahead of peak demand season. Refinery utilization this turnaround season is at the lowest level since 2013, which indicates to me that some refiners had been delaying maintenance to take advantage of good margins. Crude oil inputs to refineries this week were over 400,000 barrels per day (bpd) lower than the same period a year ago. But refinery utilization will recover in coming weeks, and within a couple of months refinery demand should increase by more than a million bpd relative to last week's demand.

At the same time, lower refinery utilization means that finished product inventories will be drawn down. In fact, the WPSR reported that finished product inventories were drawn down across the board. Gasoline inventories, for instance, fell by 6.6 million barrels last week. Distillate fuel inventories fell by another 2.7 million barrels. When you examine the overall change in inventories - crude oil and finished products - total commercial inventories actually decreased by 2.4 million barrels.

Also consider that the U.S. continues to import 8.2 million bpd of crude. The amount of the crude oil inventory build this week was equal to a single day of U.S. crude oil imports. U.S. commercial crude oil inventories stand at 528 million barrels, which is 38 million barrels higher than a year ago. Yet the U.S. still imported 57 million barrels of oil this week (while we also produced 64 million barrels).

Further, the U.S. isn’t the entire world. Global inventories are declining. The International Energy Agency recently reported that OECD stocks of crude and products have fallen for five consecutive months , and in Q4 2016 they were falling at a rate of nearly 800,000 bpd. As long as global inventories continue to drop, Brent prices will likely rise which should slow the pace of crude oil imports into the U.S.

So on the surface, high inventories may seem to be a function of the resurgence of U.S. crude oil production, which necessarily must push prices back down. Domestic crude oil production has in fact risen in recent weeks, but is still below the levels of a year ago. Major contributors to the inventory rise are persistently high crude oil imports (100,000 bpd higher than a year ago) and what looks to be the highest levels of refinery maintenance in recent years, driving refinery demand down 400,000 bpd relative to a year ago.

The news isn't exactly bullish, but fundamentally the global supply/demand picture continues to improve.

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