It's Bulls Vs. Squirrels in the Oil Market

Inventories are rising partly on hopes of an OPEC price lift.

This is not fake news:

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 4.1 million barrels from the previous week. At 483.1 million barrels, U.S. crude oil inventories are at the upper limit of the average range for this time of year.

Yet this might as well have been fake, for all the impact it had on oil prices Wednesday. Usually, when the Energy Information Administration reports another big slug of excess oil heading into storage tanks, prices fall. Instead, they're up about 4.5 percent since then. That’s despite inventories of gasoline and distillate also surging in the first week of January.

Before you conclude the world’s gone completely mad, it’s worth remembering that the turn of the year is always a bit weird when it comes to oil inventories. Lots of oil gets mysteriously sucked out of tanks in December ahead of year-end tax assessments (see this column from last month) only to rematerialize once January rolls around.

Those extra 13.5 million barrels of gasoline and distillate (the latter includes diesel and fuel oil) don’t quite fit that narrative. Maybe it’s just a different timing issue, though, with refiners running flat-out to build up stocks ahead of their usual winter maintenance (just like giant, cuddly squirrels).

That’s all true. But it doesn’t quite add up to a convincing reason for prices to rally.

Refiners usually take some R&R in February, so it does make sense they are running a bit harder now:

Short Month

February typically marks the low-point for U.S. refinery utilization

Source: Energy Information Administration

Note: Average refinery utilization per month since 1985. Data for November and December 2016 inferred from weekly estimates.

Still, last week’s utilization of 93.6 percent was punchy even for January; more than 7 percentage points above the monthly average and one of the highest kick-off levels of the past 25 years. In absolute terms, those five million excess barrels of gasoline in the first week represent almost half the roughly 11 million that go into storage for the whole month in a typical January, based on data going back to 1982. As for distillate, 9.2 million barrels are drained from tanks in an average January; 8.5 million just flowed in.

Milder weather offers some explanation for that last anomaly. The essential context here, though, is the existing glut: U.S. inventories of crude oil, gasoline and distillate all remain at or above the upper limit of the five-year range. So regardless of the upcoming maintenance timeout, there’s little need to act on squirrel instincts. And while benchmark refining margins are up since fall, they don’t look especially high.

Just OK

Benchmark refining margins aren't especially strong

Source: Bloomberg

Note: Nymex WTI crude oil 1st-month 3:2:1 crack spread.

One possible explanation is the OPEC factor: Supply cuts began this month. Refiners anticipating rising crude oil prices, which would also lift refined product prices, might well want to process cheaper barrels now to sell fuels at higher margins later on.

That would depend, of course, on OPEC and its associates delivering the necessary cuts. There are signs that at least some members are taking barrels off the market. But it is early days, and exempt countries such as Libya remain bearish wildcards.

With tanks still full and refiners due to ease up soon, though, the market’s ability to shrug off data like those released Wednesday rests implicitly on OPEC following through. Luckily for the bulls, the oil-exporter club has a flawless record in living up to its pledges.

OK, I made that one up.

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

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

    To contact the editor responsible for this story:
    Mark Gongloff at mgongloff1@bloomberg.net

    Before it's here, it's on the Bloomberg Terminal.