While U.S. crude oil inventories have been surging since last fall, I have argued that these inventories should peak off soon. There are several reasons for this, but the primary reason is that March is historically the month that refinery utilization is at its lowest, due to the popularity of performing refinery maintenance during the month. The difference in crude oil demand from refiners between March and July has historically been about 10 million barrels per week. This alone should be enough to halt the ~8 million weekly crude oil build that we have seen thus far in 2015.
Another factor is that the large capital spending cuts that have accompanied the oil price collapse will begin to negatively impact oil production. The Energy Information Administration reported 2 weeks ago that U.S. oil production had suffered a weekly decline for the first time since January. Last week, production was almost flat, up only 18,000 bpd over the previous week. Meanwhile, U.S. refinery inputs surged by 201,000 bpd, climbing back above 90% utilization for the first time in 2 months. This should have dropped crude oil inventories by more than a million barrels for the week, but the EIA reported a huge inventory build of nearly 11 million barrels for the week.
What is the explanation for this?
The biggest factor seems to be a surge of crude oil imports of 869,000 bpd, or 6.1 million barrels for the week. This isn’t an anomaly either. Over the past year as U.S. crude oil production rose by 1.2 million bpd, U.S. crude oil imports also rose by 900,000 bpd. Refinery inputs, on the other hand, only increased by 592,000 bpd year-over-year.
The production, refinery consumption, import, and storage numbers still leave about 5 million barrels unaccounted for the week. There is of course some margin of error in the measurements, but that’s a pretty significant number. I have inquired with the EIA about the apparent discrepancy.
However, at the important storage hub of Cushing, Oklahoma the inventory build was only 1.3 million barrels, about half of the average weekly gain over the past month. And across PADD 2 — the Midwest region that includes Cushing — crude oil inventories actually fell slightly from the previous week.
Despite the continued build in inventories, it seems that analysts and traders are beginning to conclude what I have argued here: Inventories are not going to fill completely up, forcing producers to slash production. As a result (and despite the tentative nuclear deal with Iran), the price of West Texas Intermediate (WTI) reached a 2015 high of $54/bbl this week before pulling back 4% following the release of the latest inventory report.
Certainly something has to give soon, but that something may very well be crude oil imports. Refinery inputs are now rising faster than U.S. oil production, so the only major source adding to crude oil inventories is rising crude oil imports.