A Texas tax law could muddy U.S. oil inventory data through year-end, but the crude glut is not going away and is now showing up in an oversupply of diesel and other fuels.
That's what showed Wednesday, with a surprise drawdown in U.S. crude stockpiles of 3.6 million barrels, the first decline in 11 weeks. Analysts had expected an increase, and it would be bullish for prices if inventories continue to go down.
But there was also a surprise 5 million barrel rise in distillates, which are diesel and heating oil. That weighed on the market, which had initially rallied on the drawdown in crude.
"It was a big drop in crude inventories on the Gulf Coast. It's destocking," said John Kilduff of Again Capital. "It's the Texas tax dodge kicking in."
West Texas Intermediate crude futures were slightly higher Thursday, stabilizing after OPEC said it expects rivals'' supply to contract in 2016.
Analysts have been watching for signs that the oil industry will push barrels away from the state of Texas because at year-end companies are taxed on their inventories of crude. Analysts say it doesn't usually make much difference but this year, with so much oversupply in the market, it could mean more oil going to Cushing, Oklahoma, and also more inventory being kept at sea. The effect is temporary and will reverse, analysts said.
Citigroup analysts wrote Wednesday that, "Stockpiles fell more than expected due to inventory management ahead of year-end for tax reasons. This is likely to be a feature of the U.S. data until the end of 2015, as the Gulf Coast region sharply draws down bloated crude inventories before year-end to minimize ad valorem taxes on mineral holdings."
The analysts from Citi, in the report, also noted that the Gulf Coast region saw a massive 7.3 million barrel stock draw as imports fell 700,000 barrels a day. Stocks in Cushing rose by 400,000 barrels to 59.4 million barrels. Cushing is the physical hub for Nymex crude futures, and traders worry if it becomes oversupplied, surplus crude will potentially flood the market at fire sale prices..
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"It makes sense. There's a bunch of extra tankers sitting in the Gulf," said Kilduff. "That's what caused the headline drop in inventories, was this Gulf Coast drop."
The U.S. produced 9.16 million barrels a day of crude last week, slightly below the week earlier level, but total imports rose to 8.0 million barrels a day from 7.7 million barrels the week earlier
West Texas Intermediate oil finished Wednesday's session down 35 cents at $37.16 per barrel, and heating oil, already under pressure from warm weather, fell 1.5 percent.
"The distillate build was definitely a big factor determining whatever price support came from that nebulous crude oil stat," said Kilduff.
He said gasoline demand was strong at 9.2 million barrels, up 1 pct from last year but distillate demand is down 1.2 percent.
But Andrew Lipow, president of Lipow Oil Associates, said he was skeptical the drawdown was mostly from the tax avoidance, since the barrels are taxed on Dec. 31, and it is early for the industry to be moving them. He said there were other reasons for the decline.
"Some of it was due to fog in the Houston Ship Channel affecting delivery," said Lipow.
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