Imports remain at a seasonal low… for four good reasons:
1) Lower throughput - Poor refinery economics incentivize refiners to minimize runs and therefore, demand for foreign oil.
2) Flattening of the forward NYMEX WTI curve Refiners can no longer finance oil inventory vis-à-vis the carry market in New York (unlike London) and will therefore seek to keep inventories low.
3) The taxman - As noted in the October 14th issue of , fourth quarter crude oil supplies in the U.S are defined by two distinct phases. In the first phase, turnaround season induced demand destruction generates a build of ˜12 MMbbls or 4% (±1%). 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 draw of ˜9 MMbbls or -2.8% (±0.6%). Thus, if the market follows the seasonal script, we are on pace to end this year at ˜334 MMbbls.
Update, the net disposition in oil stocks for the six reports that cover Q4, dropped by 0.7 MMbbls or 0.2%. In other words, the disposition of Q4 oil supplies has decoupled from seasonal analogues through the first half of this quarter… likely because of reasons 1 and 2 stated above.
Along this line of thinking, the first three bullets in our thesis now create a template for an even larger draw in oil supplies between now and the end of the year. Be prepared for it.
4) Strong domestic production - The EIA projects total U.S. crude oil production to average 5.33 MMbbl/d in 2009, the first production increase since 1991. EIA expects production to increase to an average of 5.46 million bbl/d in 2010. Crude oil production from the Thunder Horse, Tahiti, Shenzi, and Atlantis Federal offshore fields accounts for 12.2 percent of total U.S. crude oil production in the fourth quarter of 2010.
Last week U.S. crude oil production jumped by 2.1% to a four-and-a-half year high of 5.5 MMbbl/d. Production through the first 45 reports of this year is averaging 5.29 MMbbl/d. That represents an increase of 7.3% or 0.36 MMbbl/d over the corresponding timestep from a year ago. In other words, 7.3% of oil imports has been supplanted domestically… regardless of the efforts of Barbara Boxer et al.
Bottom line, yesterday’s DOE report was bearish, but that is nothing new. The trend in these reports has been bearish for quite some time now. We would like to think that yesterday’s weakness on the NYMEX could be attributable to the DOE report. But, that would be quite Pollyannaish of us now wouldn’t it? To think… a bearish fundamental report actually weighing upon price action. That is so 1990s kind of thinking. We will have none of it.
Rather, in the opinion of the analysts at , yesterday’s selloff likely had more to do with the strength in the dollar and corresponding weakness in U.S. equities, than it did on some bearish fundamental report.
Such is the state of oil trading nowadays.
Stephen Schork is the Editor of, and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.