Zeits Crude Oil Update: Latest EIA Data Reveals High Rate Of Oversupply

Includes: OIH, OIL, USO, XES, XLE, XOP
by: Richard Zeits

This morning’s U.S. petroleum inventory data release failed to confirm the improvement in the supply/demand balance.

Total petroleum inventory stepped even higher on a season-adjusted basis.

At the current rate of inventory build, a supply “glut” comparable to the 2009 situation may develop within few months.

IMPORTANT NOTE: This article is not an investment recommendation or research report. It is not to be relied upon when making investment decisions - investors should conduct their own comprehensive research. Please read the Disclaimer at the end of this article.

As I wrote in my previous notes, the previous two weekly petroleum inventories reports had indicated an incremental improvement in the U.S. supply/demand balance from the preceding two months, giving some hope that the supply situation may be moving towards an inflection point. Unfortunately, the fresh set of petroleum stocks data released by the EIA this morning fails to confirm the trend. Overall, the report is bearish for petroleum commodity prices and suggests that the oversupply trend continues uninterrupted.

Inventory Report Analysis

The following graph shows the trend in the U.S. commercial crude inventory growth after adjusting for seasonality. The pace of the build has remained brisk in the past two months, exceeding the pace of the build during the preceding five months by ~0.7 million barrels a day. At 413.1 million barrels, U.S. commercial crude oil inventories are currently at the highest level for this time of year in at least the last 80 years, according to the EIA.

(Source: Zeits Energy Analytics, February 2015)

The crude oil inventories do not tell the entire story, however. While the market remains oversupplied, it is important to interpret the latest crude inventory data points in conjunction with the refinery utilization data. Aggregate commercial petroleum stocks data provides a more complete view of the petroleum supply/demand balance as it effectively eliminates the noise associated with refinery utilization variability.

The graph below shows the trajectory of the U.S. total petroleum inventory surplus relative to the 5-year average. On a seasonally-adjusted basis, aggregate petroleum inventory grew by ~1.1 million barrels per day faster during the past two months than during the preceding five months. As of January 30, 2015, aggregate petroleum inventories exceeded the five-year average for this time of year by ~113 million barrels. The oversupply remains significant and the graph indicates that the modest flattening of the oversupply trajectory seen in the past few weeks did not translate into a trend.

(Source: Zeits Energy Analytics, February 2015)

During the week ending January 30, refineries operated at 89.9% of their operable capacity, a slight increase week-on-week. As a result, refineries were processing 288,000 barrels per day more than the previous week's average. In total, U.S. crude oil refinery inputs averaged over 15.5 million barrels per day during the week.

Inventory data for the largest product categories - motor gasoline and distillate - show increases in the seasonally-adjusted pace of growth relative to the preceding weeks when refinery runs were low.

(Source: Zeits Energy Analytics, February 2015)

In Conclusion…

This week's inventory data release was critically important: a confirmation of supply contraction trend could have indicated an inflection point in the supply/demand situation. I have to admit that such expectation failed to materialize this week.

Moreover, at the current rate of inventory build, a supply "glut" comparable to the 2009 situation may develop within a month.

Investors should anticipate potential impact of the deepening short-term contango on the prompt month crude price.

Examples of ETFs for which oil price fundamentals may be relevant:

  • United States Oil ETF, LP (NYSEARCA:USO)
  • iPath S&P Crude Oil Total Return Index ETN (NYSEARCA:OIL)
  • Energy Select Sector SPDR ETF (NYSEARCA:XLE)
  • SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA:XOP)
  • Market Vectors Oil Services ETF (NYSEARCA:OIH)
  • SPDR S&P Oil & Gas Equipment & Services ETF (NYSEARCA:XES)

Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment, tax, legal or any other advisory capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice. The author explicitly disclaims any liability that may arise from the use of this material.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.