Reports have offered three (wildly) different opinions of where crude oil supplies stood as of last Friday. Crude oil supplies increased by 2.86 MMbbls… according to the DOE. According to the API, crude oil supplies increased by only 0.28 MMbbls last week. And, according to a pre-report survey on Bloomberg, crude oil supplies were going to fall by 1.4 MMbbls last week.
With that said, there was nothing abnormal or unexpected about yesterday’s crude oil build. As noted in yesterday’s issue of The Schork Report, reports through the seasonal transition into the shoulder months tend to produce either greater than or less than expected reports. Whether you choose to believe crude oil stocks rose by 2.9 MMbbls or rose by 0.3 MMbbls or fell by 1.4 MMbbls, it does not matter. What matters is the trend.
In this regard, crude oil supplies have been trending inaccord with seasonal metrics since the beginning of the year. That is to say, crude oil supplies moved higher from January into the spring, dropped through the summer and now appear to be plateauing.
What differentiated this year’s movement was not the pattern, but the depth. Owing to a historically wide contango in the futures curve in the first quarter, traders were encouraged to build inventories. Indeed, crude oil supplies jumped from 325.8 MMbbls at the end of last year to 370.2 MMbbls in April; an increase of 13.6%.
Today the contango on the NYMEX has narrowed substantially. It still exists, but it no longer pays to carry crude oil forward. Therefore, a good deal of those futures contracts that were sold against inventory in January, February, March and April will not be rolled as they expire in the months ahead. Rather, refiners will likely opt to convert their crude oil stocks into products.
In this vein, as far as the trend is concerned for the fall, crude oil supplies tend to build as refineries shut in for turnarounds. Last week refinery utilization rates took a sharp (136 bp) downturn to 85.6% of capacity and runs fell by 316 Mbbl/d to a four-week low, 14.7 MMbbl/d. However, with the flattening of the curve refiners will look to minimize supply in the fourth quarter when they ramp back up from maintenance. These efforts will come in the form of increased throughput and lower imports.