Is the crude stock data in the EIA's Weekly Petroleum Status Report (Table 1 in the report) a useful tool for judging the prospects for the U.S. petroleum industry- and therefore for the global petroleum industry-or is it misleading?
With few interruptions, U.S. crude stocks increased steadily during 2015 and have continued this trend in 2016. According to weekly EIA data, average commercial crude stocks levels were 7.82 percent higher on average in March than on average in January 2016, and 13.16 percent higher than in 2015 in the week ending January 2, 2015:
With the Weekly Petroleum Status Report's publication each Wednesday, these steady increases reinforce skepticism on the potential for balanced crude supply and demand and therefore for higher crude prices domestically and internationally. Last week, when the EIA on March 23 reported a 9.3 million barrel build in U.S. commercial crude stocks-around the same time several Federal Reserve officials were suggesting a faster pace for interest rate hikes-WTI and Brent prices fell and continued to fall in the following days.
This week, after the EIA on March 30 reported a smaller build (2.3 million barrels), prices fluctuated, both up and down, despite encouraging words from Fed Chair Yellen on the pace of interest rate hikes in a speech the previous day (of course, other factors, such as OPEC member pronouncements on output policy, influence prices).
Sources of Increasing Crude Stocks
The impetus for gains in crude stocks through March 2016 comes from imports (capacity utilization increased to 88.88 percent from 88.33 percent in the corresponding 2015 period). Average daily crude imports have surged, increasing over 10 percent in January and February compared to 2015's average daily imports in those months, and 8.63 percent cumulatively year-to-date through March 25:
While crude imports have been increasing, EIA data show that domestic crude output has been decreasing. Average daily domestic crude output in the week ending March 25 decreased 3.14 percent compared to 2015's average daily crude output, while average daily domestic production year-to-date has fallen 1.93 percent from 2015's average daily output.
EIA data also indicate that crude storage volumes in Cushing, Oklahoma (comprised largely of domestic output) may have peaked at 67.491 million barrels as of the week ending March 11-presumably reflecting the decline in domestic production:
However, daily domestic crude output plus daily domestic NGLs output, which the IEA, the EIA's OECD counterpart, groups together in its monthly report, have remained more or less flat as increased daily NGLs output made up for decreased daily crude output:
Although average daily imports have surged, average daily crude supply-domestic crude production plus crude imports-has increased only modestly (2.23 percent) year-to-date compared to 2015's average daily volume, and, for the week ending 2016, less than one percent, as the fall in domestic production has balanced rising imports:
Including domestic NGL production, average daily U.S. supply of the three major components of the U.S. petroleum balance sheet in the EIA's Weekly Petroleum Status Report increased 3.04 percent in 2016 through March 25 over 2015's cumulative figure, as increased NGLs output (up 231 thousand barrels per day) and imports (up 552 thousand barrels per day) countered the 180 thousand barrel average daily decrease in domestic crude output through March 25.
Including imported petroleum products and domestic petroleum processing gains (but excluding both crude and product exports), domestic petroleum supply barely has increased through March 25 (only 1.7 percent) over 2015's cumulative average, and is down 2.06 percent for the week ending 3/25.
Turning Imports into Exports
Stocks of petroleum products are declining: while average stocks were up 12 percent in January 2016 over the level for the week ending January 2, 2015, their average level has decreased 1.80 percent in March (through March 25) compared to the average January 2016 level (fuel ethanol stocks levels have been excluded from this analysis).
Why the drawdown in March? While domestic demand has played a role, exports are significant: petroleum product exports have been growing quickly, up year-to-date 9.48 percent (or 355 thousand barrels per day) over 2015's average daily exports, and 17.15 percent (642 thousand barrels) in the week ending March 25 over 2015's daily export volume. This increase in product exports has more than made up for the decrease in crude exports (the volumes of which are less than 10 percent of product exports):
Petroleum product exports are increasing as a percentage of U.S. crude and NGLs output-up 2.85 percentage points year-to-date over 2015's daily average and five percentage points for the week ending March 25, while crude and product exports combined are up 4.24 percentage points and 2.25 percentage points for the two periods respectively:
Product exports and product plus crude exports are also increasing as a percentage of daily U.S. total crude and petroleum product supply (that is, including imports of crude and petroleum products)-in effect turning imported crude into exported products:
Because exports have grown more quickly than imports, net U.S. imports of crude and petroleum products have continued to decline in 2016 (for pre-2016 trends, see this article).
Falling Stocks, Increasing Exports
The positive performance of the U.S. petroleum industry could gain steam in coming months.
EIA and IEA data suggest that stocks should begin declining soon. While the entry into force of legislation lifting the ban on crude exports at the end of 2015 should encourage expansion of crude exports, crude imports could decrease. In its Weekly Petroleum Status Report, the EIA publishes the volume of crude imports from the top ten countries of import origin (complete data on imports by country are published with a lag in its monthly Imports by Country of Origin data series). Through March 25, imports from these countries represented ~90 percent of crude imports (7,203 thousand barrels/day versus 7,904 thousand barrels/day).
Whether these countries can maintain this level of exports to the U.S., much less increase it, may be limited. Their increased exports to the U.S. likely represent exports displaced from their other export markets rather than increased output (except perhaps Saudi Arabia). Two months of data don't make a trend, but according to IEA data for January and February 2016, net output from these countries in February-reflecting perhaps the delayed impact of low prices on investment and maintenance volumes-declined 360,000 barrels per day between January and February 2016, and 250,000 barrels per day between December 2015 and February 2016.
In addition, if seasonal patterns hold, EIA data suggests U.S. refiners will increase output in coming months. The following table, from the EIA's Weekly Petroleum Status Report, shows capacity utilization for the week ending March 25, the corresponding week in 2015, the corresponding four-week averages:
What would the incremental weekly output be at 93.4 percent capacity utilization rate the refining industry achieved on average from April through July 2015? It would be 3.855 million barrels:
Net-Net, Do Current Conditions Benefit the U.S?
Current conditions could work to the U.S. petroleum industry's advantage compared to other countries' petroleum industries. As low crude prices discourage investment in new crude capacity and reduce spending on maintenance, crude output likely will fall in many countries (as it has in the U.S.). With investment capital, equipment, and human resources more readily available in the U.S. and a large inventory of drilled but uncompleted wells, U.S. crude output likely will resume growing more quickly than crude output in other countries as crude prices rise. As a result, U.S. domestic production could both displace more crude imports and increase share of the global export market-thereby limiting the attractiveness of investment in other countries' crude production.
The same conditions could prevail in refining. Increasing U.S. product output will further reduce product imports, while increasing product exports will increase the U.S. share of the global product markets. With shrinking export markets and increased availability of petroleum products from the U.S., countries will have less incentive or need to invest in their domestic refining capacity.
By Dalan McEndree for Oilprice.com
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.