Bull Oil Thesis About Supply-Demand Balancing Soon In Trouble

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Summary

Analysis below based on EIA report for U.S. data, weeks ending August 12, 2016.

Major revision to U.S. crude production.

Total inventories reach new highs.

Bull thesis threatened.

Crude Oil and Other Supply

An increase in the underlying U.S. production by the Energy Information Administration (EIA) for August proves that EIA's projections for much lower production were overly-optimistic. This revision is a major threat to the bull thesis that a large drop in non-OPEC production, led by the U.S., will help rebalance the world oil supply and demand soon.

Crude Production

As I explained in my earlier article, the EIA estimated that U.S. crude production rose by 152 thousand barrels per day (mbd) last week. The latest estimate for production is 8.597 million barrels per day (mmbd). With this latest estimate, production is nearly 400,000 b/d higher than the EIA had forecast for August, just last month.

In the lower-48, it estimated that production increased by 100,000 b/d. This is a model revision, not an actual increase since the weekly numbers are the product of a model, not a survey.

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Other Supply

I have noted in a recent article how the "other supply" (natural gas liquids and renewables) is integral to petroleum supply. With an increase of 29,000 b/d estimated for last week, other supplies are now about 5.741 mmbd, up 5.2% over the past four weeks vs. the same weeks last year, and up 5.5% in YDT 2016 vs. 2015.

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Crude Imports

Net crude imports dropped 211,000 b/d last week. But over the past four weeks, they averaged 7.766 mmbd, up 10.8% vs. the same weeks last year.

Crude Inputs to Refineries

Demand for crude at refineries rose by 268,000 b/d last week. But the four-week trend appears to be topping out and is now 1.1% lower over the past four weeks vs. the same weeks last year.

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Crude Stocks

Because of higher demand at refineries, crude stocks dropped by 2.5 million barrels (mmb) to end at 521.1 mmb, up 65 mmb higher than a year ago.

Crude oil supplies have exceeded demand over the past four weeks by 58,000 b/d, resulting in an early start to the seasonal stock build.

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Petroleum Products

The overall trend in products remains in oversupply, though there has been some improvement (i.e., drop in the level of excess supply over demand).

Demand

Total petroleum demand averaged 20.625 mmbd last week and 21.397 mmbd over the past four weeks, up 1.4% vs. the same weeks last year. This is off from the growth rate of 1.9% YTD.

Gasoline demand at the primary stock level has slowed 1.7% over the past four weeks, only about half the rate in the YTD time frame of 3.4%. Earlier primary stock-building is probably the reason for slower demand now as opposed to a change in vehicle miles driven, which has been robust (i.e., up 3.0%).

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Distillate fuel demand, which includes diesel fuel and heating oil, dropped last week, causing the four-week trend to dip. It is just 0.3 % over the past four weeks vs. the same weeks last year. YTD, demand is down 5.3% due to the warmest North American winter on record.

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Jet fuel demand was up 6.0% over the past four weeks vs. the same weeks in 2015. YTD, demand was up 3.7% vs. 2015.

Product Stocks

Total product stocks set another new record at 872 million barrels, 48 million barrels higher than last year at this time.

The supply/demand balance is currently in oversupply by over 249,000 b/d.

Gasoline stocks dropped by another 2.7 mmb. The stock surplus vs. last year remains at 19.9 mmb, which is still quite high.

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Distillate stocks rose by 1.9 mmb to end at 148.4 mmb. What had been a large surplus has been largely relieved and now stands at just 4.7 mmb.

Conclusions

In total, inventories of crude oil and petroleum products set a new record high of 1,394 million barrels, 113 million barrels higher than a year ago. The U.S. glut continued to build.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.