Data Download: Rethinking The OPEC Cuts

|
Includes: BNO, DBO, DNO, DTO, DWT, OIL, OILK, OILX, OLEM, OLO, SCO, SZO, UCO, USL, USO, UWT, WTID, WTIU
by: Scott Anderson

Summary

Total petroleum stocks declined 4.7M bbls last week.

Total petroleum stocks have declined 26M bbls over the last six weeks.

OPEC imports are still up, but total imports are down. Have I been looking in the wrong place?

Every week after the EIA releases their Weekly Petroleum Status Report I download the updated files, consolidate them, and ultimately link them to a simple excel dashboard file which you can download for free at Excel-Data-Junkies.com. Open it up to follow along below, then let’s discuss it in the comments section below. For a methodology review, take a look at the intro “Data Download.”

Headline: Total Petroleum Stocks Decrease 4.7 Million Barrels

Following last week’s small 0.7M bbl build, this week’s inventory was down 4.7M bbls as crude stocks were nearly flat while product stocks were down 4.8M bbls for the week. Those numbers are a little bit off from the EIA’s numbers because they are reporting “Commercial” stocks only, which include a ~0.7M bbls transfer from the SPR to commercial inventories. I report total inventories, so a transfer from the SPR to a commercial tank does not affect my numbers. For everyone else reporting commercial only, over the next month or so they will be overreporting inventories by about 10M bbls, thanks to the latest SPR sales. Over the last six weeks, total petroleum stocks have declined 26 million barrels for an average of 4.3M bbls/week.

Primary Stocks Decrease 6.0 Million Barrels

Primary oil stocks (crude+gasoline+jet fuel+distillate) decreased 6M bbls last week and have decreased 24M bbls over the last six weeks for a 4M bbl/week rate over that period, after hitting an all-time high in February. As shown in the chart above, this decline is showing a few months before the seasonal declines we saw in 2015 and 2016, and the rate is a little higher as well. This bodes well for the bulls, though they still have a very long way to go.

OPEC: A new Hypothesis

OPEC imports spiked up again last week as small decreases from Saudi Arabia were offset by big increases from Venezuela, Iraq, and Nigeria. It is safe to say I am done being surprised by OPEC’s surging export numbers to the US. We are now 12 weeks into the OPEC cut and so far imports are running 300k bbl/d higher than last year. Looking at only the last 4 weeks, giving them a generous 2-month buffer for shipping times and it is even worse averaging 3.4M bbls/day, 400k bbl/d over last year and 800k bbl/d over the 2.6M bbl target I calculated they needed to hit. The bottom line is that so far there is not a bbl of evidence in US inventories that OPEC actually cut anything. In all fairness, I have said all along that my reference point would be April, so they still have time to pull a rabbit out of their hat, but it’s getting harder and harder to believe.


Maybe it is time to rethink my assumption that OPEC production cuts should ultimately be observable in the weekly US import numbers. Many analysts have pointed out that OPEC’s strategy was to maintain exports to the US while targeting the cuts elsewhere. This would keep the pressure on US shale producers, while still allowing OPEC to pull down less transparent global inventories. Of course, oil is a fungible and easily transportable global commodity, so that could only be expected to work for a few weeks. It would not take for targeted OPEC customers to start poaching shipments that would have gone to the US by outbidding US purchasers.

Maybe we could see evidence of this in the weekly EIA numbers? Unfortunately, the EIA only provides weekly import estimates for OPEC + Mexico, Canada and Colombia, so we can’t see this directly. However, we can still look at the gross numbers for some indirect insight. For the first 6 weeks of 2017, total crude imports averaged 7.9M bbls a day. For weeks 7-12 the average was 7M bbls/d, good for a 6.3M bbl a week reduction in crude imports. OPEC imports fell from 3.4M bbl/d in week 1-6 to 3.2M bbl/d in weeks 7-12, so the balance must be reduction from other suppliers.

So what does all that mean? In the big picture, not much. If OPEC really has cut production it will pop out in global inventories sooner or later regardless of where they were initially targeted. In fact, there appears to be indirect evidence of this. So OPEC has cut production and exports, but not exports to the US. However, other producers have diverted supplies that would have been destined for the US to the shorted OPEC customers, and the result is a net reduction in US imports anyway? I can’t prove that yet, but it roughly fits the facts we have at this time. Perhaps we/(I) should have a little more faith in the free market to ensure the right amount of oil gets to the right places despite the efforts of OPEC to re-route global tanker traffic. I will keep an eye on this and update with any new developments. In the meantime, total crude imports to the US are down 900,000 bbls a day over the last six weeks so perhaps we need to give OPEC a little credit for their misdirection.

For The Bulls:

This was a great week for the bulls with a 4.7M bbl decrease in total inventories and a 6.0M bbls decrease in primary oils. It’s only a six-week trend against a glut that took 2 years to build up, but you have to start somewhere. Demand for primary oils (gasoline, jet fuel, distillate) is looking good with gasoline finally showing a solid year-over-year increase. For the year, distillate is up a whopping 13% while jet fuel is up 3% and gasoline is down 3%. One other factor I haven’t pointed out yet is that NGL production is down about 7% or 2M bbl/week from earlier highs, not surprising since we have yet to see a production recovery in natural gas. NGLs fall into “other oils,” so I don’t expect they have a lot of relation to the price of crude, but they still end up in the “total petroleum” bucket and 2M bbl/w will start adding up over time.

For The Bears:

As noted above, we have yet to see a shred of evidence in the US weekly numbers that OPEC has reduced anything. Is that by some crazy design or is it because there was no cut? I don’t know, but I think the bears should start paying attention. It’s not all bad news, though, as the EIA still has US production growing at a solid ~20-25 thousand barrels a week, though they are generally conservative. In a week or two we should be seeing the monthly true up that could get us over 9.2M bbls/d and well over the July lows of 8.4M bbl/d. 25k/bbl a day adds up to 175k/bbl a week, which isn’t really large enough to show up on the radar in a given week. However, over a year that single 25k bbl/d increase adds up to 9M bbls, and we are seeing these just about every week if not more. Be patient bears, between OPEC and rising US production, the bulls still have a pretty big mountain to climb and the smallest slip could send oil back to $40.

Gut Feeling:

We now have a pretty solid six-week trend of inventories falling, despite OPEC imports and US production gains. Six weeks and 26M bbls aren’t much after a 2.5-year long crash and a 250M bbl glut, but you have to start somewhere. I’m not in the bull camp yet, but right now oil (USO) looks pretty solid to me heading to $50-55 and the risk of a collapse back to $40 is shrinking by the week. Looking back to September/October, we had an 8-week run where we pulled down inventories a little over 40M bbls (5M bbl/w) that was subsequently reversed, so nothing is certain. If we continue this pace of withdrawals through the end of April ending another 20M bbls down from here, I think the bulls can start talking about $60 again.

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.