What goes out in December comes back in January...
As noted last month in The Schork Report(12/15/10) fourth quarter crude oil supplies in the U.S are defined by two distinct phases in the GoM market area. 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. This flush typically produces a considerable draw in the month of December.
In this vein, last Wednesday’s weekly storage report from the DOE closed the books on 2010. In hindsight the seasonal draw in crude oil supplies in the GoM (PADD III) was excessive. Preliminary data suggests inventories fell by 23.5 MMbbls or 13%. That is excessive, i.e. the largest absolute draw prior to this was 15.8 MMbbls in 1987 and the largest percentage was 10.4% in 1996.
Thus, this season’s draw was large both in absolute terms and in scale. As a result the surplus to the average from the start of the decade narrowed from 14 barrels for every 100 in November to 4 barrels per 100 in December. In other words, while December’s draw was large, it was not large enough as far as the market is concerned.
For example, the contango in the front of the Nymex WTI futures curve has re-steepened over the last month. As of last night the discount on the 1st/2nd month spread has increased by 76 bps to 1.4% or $1.25 per barrel and the 1st/4th month spread has jumped by 176 bps to a 3.3% or $3.12 per barrel discount.
Got that? We just saw a massive draw in crude oil inventories last month in the U.S. and yet the market is now paying you to take even more barrels off of the spot market.
As analyzed in today’s issue of The Schork Report, as we look ahead to January we expect to see a lot of those barrels that went missing last month to reappear this month. Whereas oil supplies in PADD III have dropped in 29 out of the last 30 Decembers, they have increased in 24 of the last 29 Januarys. It is not the sure bet that December is, but it is pretty damn close.
In this respect, should January’s build in the GoM revert to the norm since the start of the decade, we can then expect to see a re-build of around 8 MMbbls, but given the contango on the Nymex, we would not be shocked to see a build of upwards of 13 MMbbls this month.
Is that bullish? No, it is not.
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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.