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Schork Oil Outlook: Free Money for Anyone With Tankage

As noted in recent issue of The Schork Report, the movement of crude oil in the U.S. in the fourth and first quarters exhibit distinct patterns at the refinery epicenter in the GoM (PADD III). At the end of the fourth quarter inventories are usually purged in accordance with end-of-year tax reporting purposes. This flush typically produces a considerable draw in the month of December.

Preliminary numbers from the DOE suggest that not only was last December’s drawdown in PADD III considerable, it was extraordinary, i.e. 23.1 MMbbls on an absolute basis and 5.8% on a ratio scale.

That comes out to 15.3 MMbbls (+198%) and 367 bps above the average from the first 9 years of the decade. Moving on, whereas oil inventories in PADD III always go missing in the month of December, they always seem to… ahem … reappear in January.

Stocks have dropped in 29 out of the last 30 Decembers, but they have increased in 24 of the 29 following Januarys. In this regard, this January is shaping up to be number 25 in 30.

Through the four weekly reports in January, oil stocks in the Gulf Coast have increased by approximately 10.2 MMbbls. As noted in the January 12th issue of The Schork Report, we typically see an 8 MMbbl build in January, but “… we would not be shocked to see a build of upwards of 13 MMbbls…” As we look ahead over the next few weeks, is there any reason to think barrels will not continue to flood the market?

That is to say, short of reversing the north-to-south flow of oil from Cushing to Freeport/Houston, what is there to prevent further builds?

Not much.

Next Tuesday the NYMEX contract for March delivery expires. Last night this contract settled at a $3.25 per barrel (-3.7%) discount to the April and a $12.61 (-13%) discount to next January

Why boil barrels today, when you can buy them, store them and lock in a profit?

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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.

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