Welcome to the hoarding edition of Oil Markets Daily!
Over the last 2-weeks, there have been 3 firms that came out publicly to state that PADD 3 refineries are hoarding crude.
The first one came from Energy Aspects, comments below:
US crude hoarding
Meanwhile, US crude stocks built by 22 mb from April to 10 May according to weekly EIA data, accounting for almost all the remaining global stock between April and mid-May.
The bulk of this was in PADD 3, though PADD 5 was also plagued by refinery outages, leading to builds on the West Coast. There is no denying that this year has seen an exceptionally large amount of unplanned US refinery outages.
Historically, runs ramp by over 1 mb/d between March and May, but so far this year runs have only risen by around a third of that amount and remain 0.8 mb/d below their seasonal average. In our view, this underpins the recent US builds, rather than any surge in US oil production. There is no doubt that output is growing strongly, but this is not the sole cause of the builds. After all, if the builds were production-led, US exports would be far higher, notwithstanding last week’s 3.3 mb/d print.
In fact, US export arbs for sour crudes have been firmly shut and for light grades been marginal at most times. A wide Brent-Dubai spread is definitely curbing appetite for US barrels in the east, but Europe has not been receiving a deluge of US grades either despite the tightness in the North Sea and Atlantic basin markets. This suggests that US refiners are keeping barrels at home in preparation for higher runs heading into the summer. As we noted earlier, there is rampant talk of USGC runs disappointing this year due to the lack of heavy sour crudes, which is the baseload barrel for refiners in the region. There is no resolution to the Venezuela situation in view, Middle Eastern producers are complying with OPEC production targets, and as long as prices remain anchored in the $70s, the likelihood of OPEC+ extending the deal over H2 19 grows. Indeed, this was the main option discussed at yesterday’s JMMC meeting (see E-mail alert, 19 May 2019), with even the ‘bearish’ option only suggesting a 0.3-0.4 mb/d easing in the cuts. So, the US could remain starved of crude this summer, and US refiners are likely holding onto any crude they can get, including domestic light grades (barring the super-light barrels which still need to find a home abroad).
Following Energy Aspects commentary, RBC was the second firm to publicly state that US refineries were hoarding crude in PADD 3:
Then both RBC and Raymond James came out with reports on this.
Raymond James then followed with:
First of all, we were skeptical. How could PADD 3 refineries hoard crude storage if inventories are bloated?
PADD 3 inventories remain higher y-o-y by as much as 25 million bbls. Absolute storage stood at 245 million bbls. How could PADD 3 refineries be facing a tight summer if storage is so high?
But EIA recently published all liquid pipelines that came online since 2010. We already wrote about the implications of this for US crude storage, but something more shocking needs to be illustrated. Linefill in PADD 3 specifically totaled 44.58 million barrels since 2010.
Source: EIA, HFI Research
This means that if we look at PADD 3 crude storage, inventories actually fell to ~185 million bbls in mid-March excluding linefill, which was the lowest level in the last 5-years. This was before PADD 3 refineries ramped-up throughput:
This means that as PADD 3 refineries reach over ~9.5 mb/d this summer, crude draws would push storage well below ~185 million barrels excluding linefill. This would send inventories into uncomfortable territories. We estimate that PADD 3 refineries can't have storage fall below 200 million barrels on an absolute basis. This means a stock drawdown of ~45 million barrels from here.
If inventories drop more than this, then export arbs will once again be shut-off.
But crude hoarding for PADD 3 refineries will get more difficult as there are 2.1 million b/d of pipeline takeaway capacity coming online from now to year-end from the Permian to the Gulf Coast. This will open up the export market, so any build-up will get quickly exported out. This volume will also divert crude that would've been sent to Cushing to the Gulf instead narrowing the Brent-WTI spread.
Net-net, if PADD 3 refineries did hoard crude, then it's only a matter of time before storage drawdown occurs. It is truly only a matter of time.
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