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What's behind these surprising crude stockpile declines — and how long they can last

Chinese laborers repair an oil pumping unit at Huabei oil field.
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The government has reported surprisingly large drops in U.S. crude oil inventories in six of the last seven weeks, but some analysts say they may not last.

The amount of crude oil in storage usually swells at this time of year as refineries scale back operations to perform maintenance. But the opposite has happened during the last two months. In all but one instance, weekly data have either showed a bigger-than-expected drop in stockpiles or confounded forecasts for a rise.

During that period, U.S. commercial crude inventory has plummeted by 26.5 million barrels, Reuters reported, citing analysts at JCB.

The pace of stockpile declines is critical because inventories remain near all-time highs amid a persistent supply glut in global crude oil. A draw down to more normal levels will play a crucial role in balancing the physical oil market and restoring some stability to the energy sector and related industries, which have been rocked by a two-year oil price downturn.

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On Wednesday, the Energy Information Administration reported crude stocks fell by 5.2 million barrels in the week through Oct. 14 as refinery activity continued to slow and imports plunged by 954,000 barrels a day. Analysts surveyed by Reuters had expected a 2.7 million barrel increase.

A 1.6 million barrel drop at the Cushing, Oklahoma, delivery hub reported Wednesday was to be expected due to an outage in the Plains All American's Basin pipeline that carries crude from West Texas to Cushing, according to Tony Starkey, manager of energy analysis at Platts Analytics.

But he said the nearly million-barrel decline in imports came as a surprise.

"Top importers into the U.S. saw volumes drop almost across the board, with notables such as Saudi Arabia showing the lowest imports since February, and Colombia showing a drop in imports of some 200 [million barrels per day] as well, its lowest level in a year," he said.

Starkey said the import collapse could be explained by a wider spread between U.S. crude and Brent prices and a more attractive cost structure for Brent — both of which make imported oil more attractive — as well as supply outages overseas. But the impact from all of those trends is currently winding down, he said.

Instead, many analysts believe the U.S. market is simply well-supplied with crude and refiners aren't keen on importing any more.

Imports began falling five weeks ago when Tropical Storm Hermine entered the Gulf of Mexico, disrupting some refinery operations. Crude imports, which hit a four-year high of 8.9 million barrels a day in the final week of August, stood at 6.9 million barrels a day last week.

"Refiners are importing less crude oil and are really just starting to draw down onshore inventory," Andrew Lipow, president of Lipow Oil Associates, told CNBC. "Week in and week out we're seeing lower amounts of imports than one might expect given the amount of crude oil we're processing."

Lipow expects inventories to continue to decline as refiners and traders begin to draw down their stockpiles to avoid a bigger tax bill, rather than buying new imported barrels. Taxes on stored barrels are assessed in parts of Texas and Louisiana at year-end.

Fuel inventories also remain elevated, and the surprise 2.5 million barrel build in gasoline stocks on Wednesday is disconcerting for refiners, Lipow said.

John Kilduff, founding partner at energy hedge fund Again Capital, agrees that refiners appear to have little need for imports. Refining margins have also eroded as oil prices rebound, prompting refiners to burn off their stocks while they wait to see if prices slide, he said. Refiners typically see profits rise when crude oil, the raw material for many fuels, falls.

Ultimately though, Kilduff said he believes barrels sitting in floating storage will finally come onshore and cause inventories to creep higher once again.

"Refinery run rates are just too low not to see substantial crude builds," he said.

Crude inputs into refineries have fallen by more than 1.5 million barrels per day since the beginning of September.

It is not unusual for 12 million barrels of crude to sit off the shore of the refinery-lined Gulf Coast, but ClipperData has tracked 22 million barrels in floating storage in the past week, according to Matt Smith, head of commodity research at the firm.

Smith said Wednesday's data marked an inflection point as refiners exit the peak of refinery maintenance season.

"Going forward, we should see refinery runs starting to increase, these refineries coming out of maintenance, and then a return to imports and a return to builds," he said.