Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Dear oil market: You're kidding right?

The price of light, sweet crude jumped by as much as 4.6 percent on Wednesday morning, with the biggest gain coming just after the Energy Information Administration released its weekly tally of U.S. oil inventories. 

Christmas Comes Early
Nymex crude futures spiked on the release of the EIA's report on Wednesday.
Source: Bloomberg
Note: Intraday pricing

Commercial crude stocks fell by nearly 6 million barrels last week, which sounds bullish until you remember one thing: Oil inventories usually fall in December. They have in all but 28 of the last 95 years, according to EIA data. The last two years that they increased -- 2008 and 2014 -- were marked by a crisis in the global economy and a crisis in OPEC, respectively.

What's more, if you look all the way back to 1920 -- when the EIA's data on crude oil stocks begins -- December stands out for having the biggest drops in oil inventories of any month.

'Tis the Season
December stands out for having the average biggest drop and absolute move in U.S. crude oil inventories since 1920. The same is true in percentage terms.
Source: Energy Information Administration

And there's a good reason for that. While the rest of us are watching fireworks and working on our hangovers, the taxman spends New Year's Eve tallying up how much oil companies have sitting idle so he can start the year off right by sending them a bill. So it pays companies to do whatever they can to empty the tanks a bit around Christmas, such as delaying imports, running the stuff through a refinery or selling. For example, imports of crude oil dropped by 6.9 million barrels, which more than accounts for the drop in stocks. Refineries, meanwhile, were running at more than 91 percent utilization.

Even with the drop in inventories, U.S. commercial stocks of crude oil and refined products stand at more than 1.3 billion barrels. Throw in the Strategic Petroleum Reserve and they top 2 billion. That glut is mirrored across the OECD and, unless there is a drastic cut in supply or demand shoots much higher than expected, it looks set to keep building through much of 2016, as I explain here. And judging from history, it should resume as soon as the festive season is over: Stocks have built by 3.2 million barrels on average in January since 1921.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net