U.S. Crude Imports Surge 30%

U.S. Crude Imports Surge 30%

4th November 2016

The onshore rig count increased 13 this week, bringing the total to 548 compared with 739 a year ago. Rigs targeting oil increased 9, standing at 450, up 42 % (134) since bottoming out six months ago in late May. Rigs targeting gas increased 3, bringing the total to 117, compared with 199 a year ago. 

On the other hand, oil prices had a turbulent week falling to below $45 per barrel (WTI), and was trading below $44 mid Friday.

On Wednesday, EIA’s data indicated oil stocks grew by 14.4 million barrels in the last week of October, the highest weekly increase on record. This enormous difference pushed oil down, erasing just about all of the gains made since OPEC announced back in September their tentative plans to cut production levels.

The 14 million barrel increase was exceptional by any standard, and it massively exceeded the consensus estimate by analysts which, according to Reuters, was for an increase of just 1 million barrels.

There are a few reasons that the EIA’s most bearish report of all time may not be quite as bearish as it first seems. Gasoline inventories continued to decline, falling by another 2.2 million barrels at the end of October, confirming demand is holding up. Meanwhile, U.S. crude production levels are more or less flat, so the stock build was not due to a dramatic increase in LTO production.

Given that little has changed from previous weeks, the leading reason for the stock build that the EIA reports is that the U.S. imported more oil than average in the last week of October;  shooting up to 9 million barrels per day - 2 million barrels per day higher than the week before and at the highest level since 2012.  Because higher imports were essentially placed into storage, there is little reason to believe that the U.S. will continue to import at such an elevated rate.

As imports return to more normal levels (~7.8 million barrels per day) in the weeks ahead, expect weekly changes in inventories to fall back to more normal levels.  The effect then could be that oil regains a bit of ground as the markets recognize that the short-term inventory build did not indicate some renewed glut in the market.

All that said, OPEC’s disagreements still loom large over the market. Their proposed cuts were never that deep to begin with, but the psychological effect has been positive, causing prices to rise. As such, the risk to oil prices is more on the downside than it is on the upside because of OPEC.

Sources: EIA Weekly Update and GCA Analysis

On the afternoon of October 31, an explosion occurred on the Colonial Pipeline Line 1, which carries gasoline from the Gulf Coast to as far east and north as North Carolina and is a key supply source for several states. This is the second major disruption of Colonial Line 1 in less than two months.

Because there are no petroleum refineries between Alabama and Pennsylvania that produce substantial quantities of transportation fuels, the U.S. Southeast is supplied primarily by pipeline flows from refineries along the U.S. Gulf Coast and supplemented by marine shipments from the U.S. Gulf Coast and imports from other countries. The Colonial pipeline system is the largest petroleum product pipeline system in the country.

Disruption at Colonial Pipeline Co.’s fuel artery running up the East Coast has highlighted concerns about America’s aging oil infrastructure. According to federal figures more than half of U.S. fuel pipelines were built before 1970, and although experts say well maintained pipelines can operate safely for decades, problems like corrosion can increase after 40 or 50 years. Building pipelines has become harder in recent years amid opposition from landowners and environmental groups concerned about safety and carbon emissions.

Colonial said the 5,500-mile pipeline, which runs from Houston to New Jersey and serves 13 states, could restart as soon as Saturday.

Weekly Recaps

Drilling Activity

The total number of active onshore rigs increased to 548.  When compared to a November 2014 figure of 1,876 active rigs, the current level is approximately 71% below the 2014 high.

Across the three major unconventional oil basins, the oil rig total increased to 285 (up 9 last week), with Eagle Ford up 1, Permian up 6 and Williston up 2.

Total U.S. rig count (including the Gulf of Mexico) stands at 569, up 12 last week, with rigs targeting oil up 9. The horizontal rig count increased to 459, up 9 last week.

Oil Price

Crude oil prices edged lower, as market sentiment remained cautious after data showed U.S. crude inventories made their largest gains in more than 30 years last week.

Brent, the global benchmark for oil, was down $4.51 to US$45.62 a barrel, reflecting a loss of 9% on the week.

WTI crude dropped $5.20 to US$44.08 a barrel, down 10.55% on the week.

U.S. Supply and Demand

Sources: EIA Weekly Update and GCA analysis

U.S. crude oil refinery inputs averaged 15.4 million barrels per day, with refineries at 85.2% of their operating capacity last week. This is 104,000 barrels per day less than the previous week’s average.

U.S. gasoline demand over past four weeks was at 9.1 million, up 1.2% from a year ago. Total commercial petroleum inventories increased by 9.0 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 18,000 barrels to 8.522 million barrels a day. The Lower 48 crude production now stands at 8.012 million barrels per day.

U.S. crude imports averaged about 9.0 million barrels per day last week, an increase of 2 million barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.7 million barrels per day, ~7% above the same four-week period last year.

Crude oil inventories decreased 14.4 million barrels from the previous week and remain at historically high levels. The crude stored at Cushing (the main price point for WTI) saw a decrease of 0.1 million barrels; total storage is 58.5 million barrels (~65% utilization).

Authors

U.S. Crude Imports Surge 30%

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com

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