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Schork Oil Outlook: Importing Our Domestic Refinery Woes Away?

On Friday Uncle Sam reported a second consecutive +2 MMbbl build in crude oil stocks, with a 2.4 MMbbl increase bringing total commercial crude inventories to 331.4 MMbbls. The Midwest (PADD II) saw a 1.8 MMbbl draw, but this was more than mitigated with a combined 2.9 MMbbl build in the East Coast (PADD I) and Gulf Coast (PADD III). All told, crude inventories are at a 5.5% deficit to the average of February 2009 and an 8.6% surplus to the 2004-08 average.

On the major products side, snowy weather kept drivers off the road and gasoline inventories grew by a seasonal 2.3 MMbbls to 230.45 MMbbls. Unsurprisingly, demand was 2.7% lower than last year at 8.8 MMbbls/d and total inventories stand 4.8% above the 2004-08 timestep and 5.9% above 2009. Meanwhile, distillate stocks fell by much less than expected. The crowd was looking for at least a 1.5 MMbbl draw and the typical draw is 2.2 MMbbls ±1.7 MMbbls. The actual number? 0.36 MMbbls. That’s shocking given the spike in implied heating demand in the East and the dearth of refining capacity.

On the periphery, propane stocks dropped for the seventeenth consecutive week, although the reported 1.3 MMbbl draw was less than half the previous report’s. Regardless, propane stocks are 18.9% lower than the 2004-08 timestep and 25% lower than last year. Jet fuel stocks also dropped, but remain well within seasonal norms at 42.4 MMbbls. Finally, at the bottom of the barrel, ?6 oil supplies remained unchanged, just 0.6% lower at 39.4 MMbbls.

Key Takeaways from DOE Report:

§ Here at The Schork Reportwe were initially shocked to see the tiny 0.36 MMbbl draw in total distillate stocks. More to the point, the draw accrued on the diesel side, supplies of heating oil (>5×10-4) in the East spiked by 1.1 MMbbls! Upon first look that was irreconcilable on a number of fronts:

o The East is the largest residential market for heating oil. The typical movement at this point in the season is a draw of 1.1 MMbbls ±0.35 MMbbls.

o Power generation in the New England market area last week (week ended Saturday, 06th February) was 2.8% higher week-on-week and 3.1% higher in the Mid-Atlantic).

o Heating demand (week ended Saturday, 06th February), weighted for heating oil per degree days was 9.1% above normal in New England an 6.5% greater in the Mid-Atlantic.

o The amount of barrels that were downgraded from LSD (>1.5×10-5 >5×10-4) to heating oil dropped by more than one third.

o PADD III supplies of high sulfur distillates were virtually unchanged, so we cannot even suggest last week’s report was a true-up of sorts with barrels in transit from the USGC to the USAC.

o Production of heating oil in the East as of Friday, 05th February, plunged by 28½% week-on-week to 0.12 MMbbl/d, a year ago production was 0.18 MMbbl/d for the corresponding report (comparison to the five-year average is not feasible given the degree of varying sulfur requirement changes over the last five years.)

The Schork Reportoffices in Pennsylvania have been snowed in pretty hard, but all anecdotal evidence aside this winter has officially broken snowfall records in a number of key heating oil markets along the East Coast. Yet total distillate stocks are 10.33% above last year and 23.32% above the 2004-08 timestep.

Last year with the economy in trouble it was not unreasonable to suggest cash-strapped consumers would put on a sweater instead of turning up the thermostat. To that end, distillate demand as measured by barrels supplied per day is down 10% from last year and 16% below the 2004-08 timestep. This is surprising given how many heating days we’ve seen. In fact, at 3.7 MMbbl/d, distillate demand is trending dangerously close to our historical 10% lower percentile of 3.3 MMbbls. Put simply, that’s a lot of sweaters.

On the other hand, a recovery in the dollar has led to much higher imports in key market areas than historically expected. Imports of total distillates on the East Coast clocked in at 0.62 MMbbl/d. That’s the second highest level of imports to PADD 1 on record, over 300% more than the 0.15 MMbbl/d imports we saw in 2009 and 95% above the 2003-08 timestep.

Specifically, we can rationalize the build in the East due to high imports. After all, through the first six reports of this year (Jan 01st to Feb 05th) high sulfur imports sum 8.3 MMbbls or 4.8 MMbbls (+136%) above the corresponding reports from a year ago.

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Stephen Schork is the Editor of, "The Schork Report"and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.