Where, oh where, have the barrels gone?
Fourth-quarter crude oil supplies in the U.S are defined by two distinct phases. In the first phase, turnaround season induced demand destruction usually generates a build in stocks. In the second phase, which begins towards the end of November, storage owners are encouraged to purge onshore inventory for end-of-year tax reporting purposes. As we see in today’s Chart of the Day, this flush typically produces a considerable draw in the month of December.
In this vein, the combined 9.2 MMbbl drawdown over the last five weeks along the Gulf Coast (PADD III) is undoubtedly the start of this seasonal event. Keep in mind, we basically always get a draw in PADD III in the month of December (per today’s Chart of the Day). For instance, according to the DOE’s monthly numbers, oil supplies have dropped in 28 out of the last 29 Decembers.
There is no reason to think this December will be any different. For instance, supplies in Cushing, Okla. (PADD II) have risen by 10% since the beginning of November, towards historical highs; 34.9 MMbbls as of December 03rd. What’s more, over the last 23 Decembers for which the DOE provides data, crude oil has moved out of PADD III to the Midwest (PADD II) 17 times. Bear in mind that there is a question regarding the DOE’s accounting of oil movements between these two market areas and a revision might be forthcoming. Barring that, crude oil is three times more likely to move out of PADD III and in to PADD II in the month of December.
Finally, while oil inventories in PADD III always go missing in the month of December, they always seem to miraculously [sic] “reappear” in January. Whereas stocks have dropped in 28 out of the last 29 Decembers, they have increased in 24 of the 29 following Januarys.
Thus, as we look forward to the end of the year we can expect further draws in oil supplies in the Gulf Coast. Then in the New Year we can look forward to those barrels coming back to shore. Although, given the flattening along the Nymex forward curve of late, the degree of January’s build remains in question.
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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.