Warning - Oil Inventory Data Could Hurt If This Theory Holds Water

| About: The United (USO)

Summary

If oil follows its tendency of the last three months, it should be in a general downtrend now.

Recently it has also been impacted by rumors around the OPEC meeting.

Based on my following of recent weekly import and inventory data, I see a pattern that I think reveals a near-term obstacle of significance to pressure oil prices.

I have a theory about the hurricane that struck the Gulf of Mexico several weeks ago. While most believe the impact of that hurricane was simply a two-week issue, I believe the ripples of its impact could result in an increase in imports this week and a significant inventory build. That might shock oil prices even lower. This is admittedly a bold theory, but I thought it was certainly worth putting out there for discussion. After all, on occasion, out of the box thinking makes for abnormal returns.

The United States Oil ETF, LP stock chart

USO Chart at Seeking Alpha

Oil prices have swung wildly this month for various reasons. A key underlying driver for lower oil prices is the ongoing impact of the September IEA Oil Market Report. It marked a key reversal in sentiment, after the data for August was positive; that followed a negative report in July. Oil prices have swung back and forth on the monthly data and are now on the downswing again in my view. Rumors around OPEC have also played a role in recent price action, interrupting the downward tendency recently. Still, I believe something else could impact oil significantly this week.

I have a theory about oil imports that I believe could drive a significant build in inventory this week or next that could surprise many. Oil inventory has seen major swings over the past three weeks, I believe all of which were due to the impact of the hurricane that passed through the Gulf of Mexico and worked its way up the East Coast. We had a near record draw from inventory some three weeks ago, followed by hardly any change in inventory the week after that; and finally last week we saw another deep draw in inventory, though it was about half that of two weeks before. Does that pattern seem familiar to you?

Think about what happens when you toss a stone into a pond. There is an initial major ripple, followed by lesser ripples separated by troughs in the water. Now think of the deep draw downs we've seen 2 out of the last 3 weeks as ripples, with the first 14.5 million barrel draw reported by the EIA followed by a lull and then the 6.2 million barrel draw down last week. What does that imply about this week's data?

It would imply that this week's data would show another lull or possibly even a bigger than expected build in inventory. Here's why I think we'll see a negative catalyst. Think about the path of the hurricane, and how it impacted ships at sea. We know the first major drawdown was the result of imports dropping off significantly (by 1.8M bpd to an average of 7.1M bpd) because ships were stalled at sea waiting for the storm to pass. But was that the only disruption to ships at sea?

The storm followed a path across the Atlantic Ocean in order to get into the Gulf of Mexico in the first place, and so it likely first disrupted other ships farther out from their destination port before impeding those in the Gulf from reaching shore. As a result, I believe that initial delay of ships at sea outside the Gulf of Mexico was what was behind last week's deep draw down in inventories. At this point, the disruptive ripples should be dissipated significantly, and normal import and inventory activity can resume.

The week after imports averaged 7.1M bpd, they rose 993K bpd to an average of 8.1M bpd. That still left them short by about 807K bpd of the week before the hurricane. Yet imports only increased by 247K last week, to average 8.3M bpd. So, theoretically, if the ripples follow a predictable pattern and normalize given the hurricane is long gone, imports could average as high as 8.9M bpd this week, and inventory could build or at least be less favorable to oil prices, if not unfavorable. Now I may be missing the impact of other factors that some of you may be aware of. Please feel free to comment about those below the article.

The gasoline pipeline leak is also an issue of the past at this point, and with the summer driving season over, refiners must begin to work toward winter fuel and distillate production. That is all the more reason to see crude oil inventory build as maintenance takes place.

Oil & Energy Complex Securities

09-27-16

2:10 PM EDT

United States Oil (NYSE: USO)

-2.9%

iPath S&P GSCI Crude Oil (NYSE: OIL)

-2.9%

Energy Select Sector SPDR (NYSE: XLE)

-0.8%

SPDR S&P Oil & Gas E&P (NYSE: XOP)

-2.7%

Exxon Mobil (NYSE: XOM)

-0.0%

Chevron (NYSE: CVX)

+0.5%

Occidental Petroleum (NYSE: OXY)

-1.0%

ConocoPhillips (NYSE: COP)

-1.6%

BP (NYSE: BP)

-0.0%

Total S.A. (NYSE: TOT)

-0.3%

Phillips 66 (NYSE: PSX)

+0.2%

Pioneer Natural Resources (NYSE: PXD)

-1.2%

Marathon Oil (NYSE: MRO)

-2.8%

Schlumberger (NYSE: SLB)

-0.6%

Halliburton (NYSE: HAL)

-1.8%

Tuesday's trading in energy reflects the letdown of the OPEC meeting, where we hear a deal announcement is unlikely to be announced. Unfortunately, these losses could be compounded on Wednesday if I am right about disappointing import and inventory data. Remember, though, it's just a theory. I expect you will also be interested in my recently published expectation for oil prices to fall significantly into the $30s near-term and my recommendation to underweight the energy sector. Readers interested in my regular coverage of energy and the factors that move it can follow my column here at Seeking Alpha.

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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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