This Is Rebalancing?

Oil's Big American Glut Is Resting Elsewhere

There's rather a lot hanging around as refined products, and abroad.

Excess crude oil inventories in the U.S. are finally and clearly in retreat as OPEC's output agreement nears the end of its fourth month. But those oil bulls looking for higher prices shouldn't get too excited just yet -- the surplus may just be moving elsewhere.

True, the crude stockpile fell in each of the first three weeks of April, and the 3.64 million-barrel decline in the last of those was the biggest weekly drop of the year, according to the Energy Information Administration. Over the period, inventories were drawn down at an average rate of 326,000 barrels a day, and a further 63,000 barrels a day have been drawn from the Strategic Petroleum Reserve (SPR) as part of a program of sales put in place last year.

This is far from spectacular, but it does buck the seasonal trend. U.S. crude oil inventories typically rise during the first four months of the year, so the draw this year has begun about a month earlier than usual.

Stubborn Stockpile

U.S. crude stockpile remains stubbornly high in the face of OPEC output cut

Sources: EIA, Bloomberg

U.S. refineries are helping to drain the glut. The amount they processed has soared as plants have come back into operation after normal seasonal maintenance. Volumes have climbed to 17.285 million barrels a day, the highest in data that goes back 35 years. Rates could climb even further in the weeks ahead -- expansions at several plants across the country have boosted capacity to 18.62 million barrels a day, up by around 300,000 barrels over the same time last year.

This all ought to be good news for the bulls, but we need to look deeper. If the products being produced are not consumed, the glut is simply being transferred from crude to refined products.

Stockpiles of most refined products usually fall in the early part of the year. But middle distillates -- which include heating oil, diesel and jet fuel -- have been the only major refined product group where inventories were falling abnormally fast. They started falling in early February and were down 13 percent by mid-April.

Bucking The Trend

The slide in distillate inventories was reversed in last week's data

Sources: EIA, Bloomberg

In the most recent week's data, the volume of gasoline and middle distillates in storage rose, more than offsetting the draw down in crude stockpiles. Gasoline stores have been increasing for the last two weeks, bucking seasonal trends. Excluding the SPR, total U.S. oil inventories, including crude and refined products, rose by more than 6.6 million barrels in last week's data -- their biggest increase since early February. Hardly evidence of a rebalancing.

In order to really clear the glut, crude must first be processed into products and then those products need to be consumed. But the early surge in U.S. oil use seems to be waning. Although four-week-average gasoline deliveries -- a proxy for demand -- soared in February and March, they have plateaued at around 9.3 million barrels a day since late March, down around 100,000 barrels a day year on year. It's a natural consequence of the 21 percent average increase in retail gas prices so far this year compared with the same period in 2016. Middle distillate demand has also slipped back from its pickup earlier this year.

Shipping Out

U.S. crude exports hit their second highest level since restrictions were eased

Sources: EIA, Bloomberg

There's more bad news for the bulls. Sure, U.S. exports of crude have soared after a 40-year ban was lifted in December 2015 -- overseas shipments jumped to 1.15 million barrels a day in last week's data, the second highest level on record. That helps to drain the crude glut, but may just be moving it elsewhere.

Cuts? What Cuts?

U.S. crude oil imports from Middle East OPEC countries show no sign of falling

Sources: EIA, Bloomberg

At the same time, imports from Middle East OPEC countries show no sign of falling. With delivery times to the Gulf coast averaging 42 days, output cuts made before mid-March ought to be reflected by now in lower arrivals. It's as if the crude that's been extracted in the U.S. is just swapping places with that being extracted in the Middle East.

Oil bulls should worry that, far from easing, the U.S. oil glut is just being shifted downstream and overseas. OPEC has more work to do to get the market back into balance, and at the very least will need to extend its current accord when it meets May 25.

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

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