Over the last five weeks crude oil supplies in the U.S. have increased by 7.87 MMbbls. That is virtually spot-on to the seasonal norm. Supplies at the NYMEX delivery hub in Cushing, OK have dropped by 1.09 MMbbls. That too is well within the parameter of the seasonal norm, but it is not the flood of oil we were expecting.
Aside from a disruption to the flow of Canadian crude oil, we thought the table was set for a material build in supplies at the NYMEX hub in PADD II. On September 07th the spot contract for October delivery settled at a $1.76 or 2.3% discount (contango) to the November contract. For the 21 sessions that this time-spread was prompt (August 23rd to September 21st) it averaged a $1.19 discount.
That was more than enough of an inducement to carry barrels, i.e. increase inventory by taking delivery of the October barrels to deliver them against the November contract one month hence. That is not exactly the way things panned out in Cushing. Stocks are down there, but aggregate PADD II supplies have increased. As of last Friday the extant surplus to the seasonal norm has increased by 118 bps to 44.3%. Be that as it may, we have not seen the surge in stocks we expected. Not only did the futures curve provide incentive, but imports into the region were strong, i.e. 8.7% above what we normally see around this time of year.
So how come we did not get our surge? As explained in The Schork Report, the correlation between the front-month NYMEX spread and inventories three weeks later is a firm -0.597, the coefficient of determination (R2) is a somewhat mild 0.356 however, i.e. only 36% of the move in supply at Cushing can be explained by the NYMEX spread. We figured the sharp contango last month compensated for the R2, but in hindsight it appears that strong demand compensated for our assumption.
In this vein, refinery throughput in the Midwest has been very strong. Inputs averaged 3.28 MMbbl/d over the last five DOE reports and are running 3.3% above seasonal norms. Bottom line, refineries are now coming out of their fall maintenance seasons. Last week utilization rates jumped by 120 bps to 83.7% of capacity which means demand for oil is picking up. Rates will continue to rise through the quarter, but with oil supplies currently in the 99th percentile (1993 to present), refiners (with perhaps the West Coast being the exception) have more than enough oil to boil.
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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.