COMPARATIVE INVENTORY & OIL STORAGE REPORT OCTOBER 16, 2020 (2020-25)

PLEASE NOTE: I will be on vacation next week October 19-25 and will post only an abbreviated report summarizing highlights and showing a few key charts. Thanks for your understanding.

Art

Highlights of this week’s storage report:

  • Comparative inventory fell for the twelfth consecutive week. It was the largest decrease since February 2019.
  • Comparative inventory fell for all products except residual. Distillate C.I. decreased the most in three years.
  • Crude oil storage decreased -3.8 mmb.
  • WTI futures are at about $3.00 under-priced at $40.89.
  • Weekly consumption rose +1.1 mmb and the 4-week average increased +0.6 mmb.
  • An SPR withdrawal of 1.8 mmb and unaccounted oil of -5.5 mmb were factors in the crude oil supply balance.

Comparative Inventory

Comparative inventory decreased -3.96 mmb this week. C.I. has decreased for twelve consecutive weeks but his week’s decline about twice as large as the -7.1 mmb average for those three months. 

A crude oil withdrawal of -3.82 mmb when the average is a +2.47 mmb addition led to a -6.29 mmb decrease in crude C.I. (Figure 1). Similarly, gasoline stocks fell -1.63 mmb when a -0.76 withdrawal is normal, resulting in a -0.86 mmb decrease in C.I. A much larger-than-average distillate withdrawal led to a -5.87 mmb change in C.I. This was the largest decrease in distillate C.I. since August 2017 and potentially significant if it proves to be more than a one-off event.

Figure 1. Comparative inventory decreased -15.63 mmb week ending October 9.
Crude oil and all key refined products C.I. decreased except residual.
Source: EIA and Labyrinth Consulting Services, Inc.

Other than crude oil and distillate, the largest C.I. change this week was propane-propylene which fell -2.38 mmb probably because of cold weather in the northern half of the country (Figure 2). Kerosene-jet stocks fell -1.47 mmb for a C.I. change of -0.5 mmb. Residual C.I. increased +0.6 mmb on a larger-than-average addition of 0.66 mmb.

Figure 2. Comparative inventory decreased -15.63 mmb week ending October 9.
Crude oil and all key refined products C.I. decreased except residual.
Source: EIA and Labyrinth Consulting Services, Inc.

Comparative inventory has fallen -86 mmb since the week ending July 17 (Figure 3). The C.I. decrease was about twice as large as the average of -7.1 mmb over the last 3 months. Based on the average twelve-week decline rate, it will take 9 weeks for C.I. to reach the 5-year average.

Figure 3. Comparative Inventory has fallen -86 mmb (-58%) since July 17
-16 mmb decrease in C.I. week ending October 9 twice as large as average
9 weeks for C.I. to reach 5-year average at -7.1 mmb/week mean decline rate.
Source: EIA and Labyrinth Consulting Services, Inc.

Comparative inventory vs WTI price data continues to move toward the five-year average but has moved below the green yield curve over the last five weeks (Figure 4). This reflects more pessimistic market sentiment as Libya’s output is increasing and Norway’s oil worker strike has been resolved.

The weekly average WTI price of $40.19 was about $4 under-priced based on the yield curve. The current WTI futures price on October 7 of $40.89 is about $3.00 under-priced.

Figure 4. U.S. comparative inventory fell -15.63 mmb to 63 mmb more than 5-year average
Weekly average WTI of $40.19 is ~$4 under-priced
based on the green C.I. vs price yield curve.
Source: EIA and Labyrinth Consulting Services, Inc.

Supply and Demand

Table 1 provides a convenient snapshot of the major factors that affected this week’s storage report. Weekly consumption increased +1,130 kb/d and 4-week average consumption rose +614 kb/d. Refinery intakes fell -276 kb/d and field production fell -500 kb/d to 10.5 mmb/d.

Table 1. Petroleum status vital statistics.
Source: EIA and Labyrinth Consulting Services, Inc.

There was a +1,159 kb release from the strategic petroleum reserve (SPR) and a -5,495 kb volume of unaccounted-for oil. Crude oil imports were -446 kb/d lower at 5.3 mmb/d and crude exports were -524 kb/d lower at 3.4 mmb/d. Net refined product exports increased +270 kb/d.

U.S. refined product consumption rose +614 kb/d from 17.8 to 18.4 mmb/d for the week ending October 9 (Figure 5). Recovery increased +11.5% from 58.5% to 70% of the 5-year average. That is the highest level since the consumption and economic collapse earlier this year.

Figure 5. U.S. refined product consumption rose +614 kb/d from 17.8 to 18.4 mmb/d
week ending October 9
Recovery increased +11.5% from 58.5% to 70% of the 5-year average.
Source: EIA and Labyrinth Consulting Services, Inc.

The consumption increase this week was headlined by diesel which jumped from 17% to 87% recovery in a week (Figure 6). I have to be skeptical that this is a data problem or one-week anomaly. If additional data proves it to be durable in coming weeks, it would be quite significant indicating real strength in the pace of the U.S. economy. Gasoline’s recovery was unchanged from last week at 84%.

Figure 6. U.S. refined product consumption has recovered to 70% of the 5-year average
Diesel has recovered to 87% and gasoline to 84%
Kerosene jet is at 29% of its 5-year average.
Source: EIA and Labyrinth Consulting Services, Inc.

U.S. refinery intakes fell from last week’s highest level since week ending August 28 (figure 7). This week, intakes decreased -276 kb/d to 13.6 mmb/d. This is -1.9 mmb/d less than a year ago and -2.0 mmb/d less than the 5-year average.

Figure 7. U.S. refinery intakes fell from highest level since week ending August 28.
Intakes decreased -276 kb/d to 13.6 mmb/d week ending October 9.
-1.9 mmb/d less than a year ago and -2.0 mmb/d less than the 5-year average.
Source: EIA and Labyrinth Consulting Services, Inc.

Discussion

The most remarkable aspect of this week’s storage report is that oil prices did not increase. Everything about the report was strongly positive except lower refinery intakes. Consumption recovery reached the highest level so far. Distillate/diesel demand and inventories have been a major drag on oil markets and this week’s distillate withdrawal was the largest in three years. Across-the-board larger-than-average withdrawals of crude and most other products should have moved price higher at least for a day or so. Instead, futures fell -$0.08.

New Covid-19 surges in Europe, the apparent resolution of Libya’s production hiatus and the settlement Norway’s oil-field workers strike all weighed on market sentiment. Reports by OPEC and IEA this week emphasized the magnitude of over-supply and fueled growing sentiment that oil is not part of the global energy future. These seemed to underscore the gloomy views from BP’s Energy Outlook published last month.

That is the mainstream explanation.

Comparative inventory, however, anticipated this price trajectory. Figure 8 is from the April edition of The Comparative Inventory and Oil Storage Report. Even with limited data, the anticipated green yield curve was largely the same as it is today as shown above in Figure 4.

Figure 8. Comparative inventory chart from April 2020.
Source: EIA and Labyrinth Consulting Services, Inc.

A flat yield curve means that markets have little sense of supply urgency. Even large changes in C.I. do not result in much change in price. The downward price departure from the yield curve in Figure 4 probably reflects sentiment and price discovery. WTI should return to the low-to-mid $40 range once the market changes its present negative perspective.

Some analysts see more downside than upside price risk. Comparative inventory suggests the opposite.

The post COMPARATIVE INVENTORY & OIL STORAGE REPORT OCTOBER 16, 2020 (2020-25) appeared first on Art Berman.