U.S. Crude Inventories Are Set To Decline In 2H 2019: Take A Look At Refinery Throughput And Adjustment Factor

Jul. 09, 2019 11:34 AM ETThe United States Oil ETF, LP (USO)23 Comments
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Prime Value


  • KSA will keep exports low until they balance US market.
  • Unusually low US refinery throughput and extremely high adjustment factor explain to a large extent the recent surplus in US crude inventories.
  • These trends should reverse over the driving season.
  • If everything goes back to "normal", US crude inventories are set to decline materially in the second half of the year.

2018: It was all about the Saudis.

Last year was a massively disappointing year for oil bulls. WTI price dropped from $76 to $45, more than 40% in just weeks. What was thought of as one of the most bullish events for the oil thesis - Iranian sanctions - turned out to be a nightmare for bull investors.

The announcement of Iran sanctions led the Saudis to increase their exports in order to calm the oil markets from fears of oil prices going through the roof. Started in May/June, KSA flooded the market as we can see below:

"Source: Author based on EIA"

What made it worse was that Trump granted 8 countries waivers to keep importing Iranian, in early November, just few days before the US midterm elections. Iran did not see their exports reduced as expected and the Saudis had already flooded the market. Combine with an extraordinary shale growth and a global slowdown and WTI dropped +40% in just weeks.

Once the driving season finished, the market could not absorb this new wave of supply and by the end of the year US crude inventories rose by almost +60MM barrels from its bottom:

"Source: Author based on EIA"

Saudi Arabia will not be fooled again

KSA realized they made a mistake by increasing exports and oversupplying the market. However, they are really gone 180 degrees.

Their goal now is to reduce stocks until 10Y average or ~390MM US crude inventories, where historically one could see much higher prices:

"Source: Author based on EIA"

US Crude Inventories: Key Variables and what to expect for 2H 2019.

  • Crude Imports: KSA and their new policy towards US.

The Saudis are serious about bringing US market to balance. They have been trying to do so since December. Not only KSA, but also Iraq and

This article was written by

Prime Value profile picture
Value investor with contrarian bias, preferably towards small companies with predictable cash flows and good management. We used to contribute as "Dhandho Investor" and now we'll be contributing under Prime Value.

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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