Close enough for government work?
As first reported by our friend Joshua Schneyer at Reuters, far greater volumes of crude oil than previously reported are flowing from the U.S. Midwest (PADD II) into the epicenter of the U.S. refinery market in the Gulf Coast (PADD III). This is troubling. According to the DOE’s latest monthly update, the amount of crude oil that flowed out of PADD II (inclusive of the Nymex delivery hub in Cushing, Okla.) in September into PADD III was 4.9 MMbbls.
A flow of 4.9 MMbbls represents a 230% increase over August and a 220% increase from September 2009. So, what gives? What the H, E (double) hockey sticks occurred in September to generate such a massive, albeit, UNREPORTED, flow of oil out of the Midwest? We don’t know. More importantly, the DOE maintains that that 4.9 MMbbl flow in September is correct and therefore will issue revisions to previous draws dating back to as early as 2009!
This obviously raises questions over the accuracy and survey methods of the EIA. To wit, the EIA discovered it was working with incomplete data this year and potentially in 2009, and will sharply revise upward the figures, EIA statistician Michael Conner told Reuters. Therefore, there is potentially a hell of a lot more oil — upwards of 100 Mbbl/d over the last two years — that has been flowing out of the Midwest (which we cannot emphasis more, is inclusive of the Nymex hub) than previously thought.
According to the DOE, revised figures will show that the pipeline flows this year have been “close to, or much closer to” the record high levels recorded in September. If this is true and according to Reuters’ sources at the EIA they are, then the term structure on the Nymex was completely artificial.
As discussed in today’s issue of The Schork Report, the steep contango we saw in September implied that demand for oil in PADD II was poor given the incentive to store barrels. However, pending DOE revisions now indicate that demand for oil from the epicenter of the refining industry was potentially greater than thought… and that is potentially bullish.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.