Weekly Crude Oil Inventory Report - Disappointment Masquerading As A Very Large Drop In Domestic Production

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Summary

Bearish.

Domestic production decreased by 194,000 barrels per day. The largest decline since 2013, although 80% of the drop comes from Alaska.

Crude oil inventories decreased by 2.2 million barrels.

Gasoline inventories decreased by 100,000 barrels.

Distillate inventories decreased by 1.6 million barrels.

Overall, this is a very disappointing report for crude oil prices. Although at first glance the report shows the largest drop in domestic production since October 2013 and a decline in crude oil and petroleum products, a closer inspection of the data reveals a very small change in stocks for this time of the year, and a decline in production that is likely to revert in the coming weeks.

Crude oil prices (NYSEARCA: USO) froze for several seconds after the report came out, then dropped $2.0/bbl after the market processed the information.

Source: Finviz.com

Stocks:

* Crude oil inventories decreased by 2.2 million barrels.

* Gasoline inventories decreased by 100,000 barrels.

* Distillate inventories decreased by 1.6 million barrels.

At first glance, a decent drop in inventories of crude oil and petroleum products, especially considering than imports increased during the week, but severely disappointing in light of the decline in domestic production and the fact that by now refineries should be operating at maximum capacity. In addition, during the last couple of reports, weekly increases in imports alternate with decreases the following week, and may be reflecting biases in how the information is collected and reported. Therefore, this week increase in imports may actually mean that they remained essentially unchanged for the week, making the decline in crude oil stocks even smaller.

Source: EIA

Production and Refinery Utilization:

* Domestic production fell by 194,000 barrels per day; a truly massive drop in production and the largest since October 2013, although 80% of the decline in production comes from Alaska and is likely to revert during the coming weeks.

* Domestic production in Alaska dropped by 156,000 barrels per day; a very large number, but likely to revert back to normal levels during the coming weeks. Production levels are always very volatile in Alaska over a weekly basis.

* Production in the Contiguous United States (excluding Alaska) decreased by 38,000 barrels per day; a respectable number that pales when compared with the overall drop in production.

* Imports increased 808,000 barrels per day; a very large number that follows a 884,000 barrel per day drop during the previous week. By now, it's clear that the EIA weekly import numbers show a pattern of increases followed by decreases of the same magnitude, and may not be reliable over a weekly time basis.

Source: EIA

* Refinery utilization remained almost unchanged from last week with a 50 basis point drop. No major changes in utilization amongst the relevant regions (PADD 2 and PADD 3). As mentioned before, utilization levels are finally at normal levels for this time of the year.

Source: EIA

Cushing, Oklahoma:

* Cushing, OK inventories decreased by 100,000 barrels; a very small change in inventories. We believe that Cushing is essentially at maximum operating capacity.

* More importantly, Gulf Coast inventories increased by 1.3 million barrels; an unexpected increase at a time when inventories should be decreasing.

Source: EIA

Conclusion:

A very interesting report with a very large decrease in domestic production that fails to live up to expectations. Although production in the Lower 48 decreased by a respectable amount, this number represents only 20% of the drop in domestic production and overall output may rise during the coming weeks. In addition, despite the drop in production, inventories of crude oil and petroleum products fell by a relatively small amount and crude oil inventories actually increased in the Gulf Coast (PADD 3), the largest district in terms of storage and refining capacity.

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.

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