With shale producers adding rigs every week, output is rising and so are stockpiles which weighs on prices and curbs their upward potential, ruining OPEC’s efforts to rebalance the market.
That’s good news for bears and bad news for bulls, but according to RBC commodity analysts, it is not so much the growing production which is hurting the price rise. It is refinery runs, which have been lower over the first quarter of the year because of maintenance season.
In fact, the RBC analysts have estimated that lower refinery runs – below 90 percent of capacity – in the first quarter have accounted for the bulk of the inventory increase, a hefty 64.2 percent of it, while rising production only accounted for 11.5 percent. Where did the rest of the stockpiles increase come from? Imports accounted for 20.8 percent of it, and the strategic petroleum reserve accounted for the remaining 3.5 percent.
When they wrote their estimates, the analysts were confident that, as maintenance season ends, inventories will begin to fall. However, this is not yet happening, despite the Energy Information Administration reporting refinery runs of over 90 percent for the last two weeks.
In the week to April 7, these averaged 91 percent, with throughput rising by 268,000 bpd from the previous week to a respectable 16.7 million barrels per day. Crudeinventories fell by 2.2 million barrels. At the same time, gasoline inventories were down by 3 million barrels.
These developments have been steady over the past weeks. In the week to March 31, refineries ran at 90.8 percent of capacity, processing 16.4 million barrels per day of crude. The week before that, they ran at 87.4 percent of capacity, processing 15.8 million barrels of crude every day.
So, run rates are increasing, but it seems that they are not automatically drawing on inventories. Perhaps production does have a bigger part to play? The number of active rigs has been rising steadily and inexorably since late 2016, from 425 at the end of September 2016 to 672 as of April 7, this year. That’s a lot of rigs, and the increase will continue, especially if OPEC agrees on an output cut extension into the second half of the year.
Production is now around 9.1 million bpd, up from 8.6 million bpd back in September. That’s a half-a-million-barrel increase in daily output over a period of six months, but according to RBC’s calculations, it has only contributed 9.8 million barrels to commercial inventories in the same period. Another 17.7 million barrels came from higher imports.
The good news, says RBC’s commodity analysis department, is that refinery runs are picking up, and driving season is around the corner, so inventories will start going down. But while it’s true that driving season traditionally causes an increase in fuel demand, last year’s was a disappointment. In the middle of July—the height of the season—gasoline inventories were going up rather than down, taking the market by surprise and pushing down prices.
Apparently, calculations and estimates don’t always work, because it’s simply impossible to predict the driving behavior of hundreds of millions of people. Leaving this subject aside, EIA’s reports are considered by some to be increasingly irrelevant to the actual state of oil’s fundamentals in the United States.
Amid so much uncertainty, the only thing that is certain is that crude oil production is growing, and there are no signs that this will change while the going is good and prices stay above $50 a barrel. The low gasoline prices resulting from this higher output could stimulate drivers to drive more, but this is not a given. So, whatever the biggest culprit behind the persistent inventory rise, the rise seems to be a fact, however relevant or irrelevant EIA’s figures are.
By Irina Slav for Oilprice.com
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