- Recently, both crude and total stocks in the oil space have risen, spurred by increased drilling.
- This move looks bearish and is by itself, but it's important to put into context recent trends versus what was seen during the real energy downturn.
- This is a modest increase in inventories that will likely come down later this year, especially if the rig count continues to decline.
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For the past few months now, since oil prices climbed back up from the $40s, WTI has been in something of a holding pattern, moving within a few dollars in the mid to high $50 range. On one hand, you have bears touting growing supply figures and weakening global demand growth, and on the other, you have the bullish news related to OPEC’s cuts, various geopolitical tensions, and the prospect that global demand will be higher this year than any year ever in the past.
In this particular article, I’d like to point you to some recent trends we have seen in the space, trends that the bears use to justify their stance, and I’d also like to put this in perspective so we have a proper understanding of just where we stand on the oil frontier.
Commercial crude stocks are climbing
First, let’s begin with commercial crude stocks, as reported on a weekly basis by the EIA (Energy Information Administration). In the graph below (which I adjusted on the y-axis so we can see the fluctuations), you can see the trend that commercial crude stocks have taken over the past 52 weeks. Over this time frame, the data has been, relative to this time last year, fairly bearish.
You see, as of the time of this writing, crude stocks classified as ‘commercial’ stand at about 452.93 million barrels. This represents a sizable increase of about 27.03 million barrels over the 425.91 million barrels the US saw the same week of 2018. Such a large move higher, on its own, is undeniably bearish on a relative basis, but when you consider the overall trend that crude stocks have taken in recent years, the picture doesn’t look quite as bad.
In the chart above, for instance, you can see this week’s commercial crude stocks, not only for the beginning of March of this year, but for each of the five years leading up to this. Back in March of 2014, stocks were only 332.45 million barrels, and this figure was the only one included in the chart that recorded pre-glut levels. Starting later in that year, with OPEC unwilling to cut output, inventories began rising, and in March of 2017, they totaled 528.39 million barrels. To put that in perspective, in order for stocks to hit those same levels, we would need to add on another 75.46 million barrels to commercial stocks.
A similar picture with total inventories
In addition to commercial crude stocks, I decided to look at the aggregate of commercial crude and all other product categories like motor gasoline, distillate fuel, and more. In the graph below, you can see the same basic trend that total stocks have taken over the past year. Between March of 2018 and today, inventories have risen 42.12 million barrels. This is interesting because if you take the inventories of commercial crude last year and compared them to total stocks last year, the former made up just 35.4% of the latter, but of the build has accounted for 64.2% of the latter.
What this data suggests is that either there’s a disconnect in demand for products versus crude stocks, and/or the recent build in crude stocks just hasn’t had enough time to spread out more evenly across the other fuel categories. Given the natural inclination here for a time lag, I would suggest the latter is likely true. If so, what this could mean is that once global demand picks up next year, and assuming supply doesn’t rise enough to offset it, we could expect commercial stocks to shrink faster, while products take more time to work through the system.
In the next chart, shown above, you can see the March-to-March results for total inventories for 2014 through this year. Back in 2014, products were just 1 billion barrels. This rose to 1.15 billion barrels in 2015 and it continued to rise until hitting 1.35 billion in March of 2017. This is 102.12 million barrels higher than where we are today.
The rig count ticks lower
In the short term, what inventories are and what the trends illustrated moving forward are, are both really important for investors, but if you want a longer-term indicator of what might be happening, you need to look at the rig count. According to Baker Hughes, a GE Company (BHGE), the oil rig count in its latest week came in at 834. While this is higher than the 796 units in operation the same time last year, it represents a decline of 9 from a week earlier.
Not only that, but the rig count has fallen for three straight weeks now and it’s down from the recent peak of 888 units reported in mid-November of last year. In Canada, meanwhile, the oil rig count declined by 22 for the week, dropping to 118 compared to the 196 in operation this time last year. While rigs do generally become more productive, sometimes on a monthly basis even, any sort of drop like this suggests that companies are responding to lower prices by reducing capex plans.
Right now, some investors may see the oil outlook as being weak, but we need to keep in mind the fact that, absent a real economic slowdown of significant size, the second half of 2019 should be stronger than the first half. From the first quarter of this year to the second, global oil demand should rise 0.35 million barrels per day according to the EIA, while in the third quarter, it should be higher than the second quarter to the tune of 1.07 million barrels per day (followed by a further 10 thousand barrels per day in the fourth quarter).
While I have no doubt that non-OPEC supplies will continue rising as well, the likely continuation of the OPEC+ cuts, combined with how small current builds are compared to just a few years ago, still points to the mid-$50s being the floor, not the ceiling, for oil for the foreseeable future.
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This article was written by
Daniel is an avid and active professional investor. He runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
Analyst’s 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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