As noted in recent issues of The Schork Report, fourth quarter crude oil supplies in the U.S are defined by two distinct phases in the GoM market area (PADD III). In the first phase, turnaround season induced demand destruction generates a build in stocks. 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 considerable draw in the month of December.
In this vein, preliminary numbers from the DOE suggest that not only was December's drawdown in PADD III considerable, it was extraordinary, i.e.
23.1 MMbbls on an absolute basis and 5.8% on a ratio scale. That comes out to 15.3 MMbbls (+198%) and 367 bps above the average from the first 9 years of the decade.
Moving on, whereas oil inventories in PADD III always go missing in the month of December, they always seem to reappear [wink, wink... nudge, nudge] in January. Stocks have dropped in 29 out of the last 30 Decembers, but they have increased in 24 of the 29 following Januarys. Thus, this January is shaping up to be number 25 of 30.
Through the first three weeks of this month the DOE reports that oil stocks in the Gulf Coast have increased by 5.9 MMbbls. In the January 12th issue of The Schork Report, we noted that we typically see an 8 MMbbl build in January, but "... we would not be shocked to see a build of upwards of 13 MMbbls..." We stand by that.
Our assumption two weeks ago was predicated on the front of the NYMEX WTI curve in which the spot contract was trading at 99 cents on the dollar or
$1.25 per barrel to the second month. Last night spot NYMEX crude oil closed at 97 cents on the dollar or $2.65 a barrel to the second month.
That is more, we repeat, more, than enough of a financial reward to stockpile oil in PADD III, the epicenter of the U.S. refining industry. We may not see a 13 MMbbl build, net, for January, but the builds will continue. After all, this is free money for anyone with tankage.
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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.