Art on MacroVoices: Comparative Inventory Draws Spell Higher Oil Prices

Erik Townsend welcomes Art Berman to MacroVoices. Erik and Art discuss: Comparative inventory levels on oil; Oil price responsive to inventories; Realization price recovery in crude prices takes time; Refinery intakes have not recovered; Where are average consumption levels; Outlook on gasoline & distillate stocks; Backwardation on WTI; Considerations on OPEC-NOPEC production cuts; Global market balance on oil.

Negative Correlation Between Comparative Inventory and WTI Price

  • Negative Correlation Between Comparative Inventory and WTI Price.

  • Mid-February CI ~213 mmb near April 2016 CI peak of 239 mmb.

  • 139 mmb decrease in CI since by October.

  • Limited price response.

  • Previous price response based on sentiment.

  • Negative correlation after Feb 2017 still good just lower amplitude.

Comparative Inventory vs. WTI Price Yield Curve

  • Yield curve is not a mathematical regression because price excursions based on sentiment (both positive and negative) are not based on supply-demand fundamentals.

  • Mid-cycle price is where yield curve intersects y-axis (5-year average).

  • Limited price response in 2017 because of huge inventory overhang.

  • More curvature going forward means greater price response to falling CI.

Inventory Buildup Explains 2014 Oil-Price Collapse

  • Inventory build began in January 2014 but price collapse did not begin until June.

  • Low price and change from backwardation to contango in forward curves favored

    storing rather than selling oil.

  • 5-year average has risen over time as storage levels increased.

  • Current 74 mmb gap between inventory and 5-year average still near high of 99

    mmb in 2011.

Refinery Intakes At Record Levels Before Hurricane Harvey

  • Record refinery intake levels > 17 mmb/day in 2017 fell because of hurricane disruption of refinery operations and pipelines.

  • These are recovering.

  • Production also fell but recovered only to fall again during recent Hurricane Nate.

  • Also temporary.

  • Net crude oil imports have fallen in 2017.

U.S. Consumption of Refined Products at Record High Levels in 2017

  • Demand for refined products has increased as economy improves and products are still relatively cheap.

  • Consumption reached record levels during summer of 2017.

  • Now declining seasonally.

Net Imports of Refined Products Declined ~ 500 kb/d in 2017

  • Greater product supplied resulted in a substantial decline of refined product net imports.

  • Average 2017 net imports were almost 500 kb/d less than in 2016.

  • That translates to almost 3.5 mmb/week.

  • A major factor in inventory and comparative inventory reduction.

Crude Oil Exports Increased 75% in 2017

  • Crude oil exports increased 364 kb/d in 2017.

  • That translates to 2.6 mmb/week, a substantial factor in inventory and comparative

    inventory reductions.

  • Record export levels over last 3 weeks—1.9, 1.3 and 1.8 mmb/d.

  • Exports competing with OPEC in European and Asian markets.

  • Shale production was not a threat to OPEC before significant exports began.

Diesel is Major Growth Component for U.S. Refined Product Consumption and Exports

  • Diesel (distillate) comparative inventories have fallen through most of 2017.

  • Distillate CI currently negative.

  • Both distillate and gasoline CI declined during hurricane disruption of refineries to

    meet demand.

WTI Forward Curve in Backwardation

  • Backwardation means that short-dated contracts (Nov 16-Apr 17) have a higher price than longer-dated contracts.

  • Reflects perception of tightening supply.

  • High volumes of producer hedging depressing contract prices 1-2 years in the


  • Discourages storing oil more than 6 month contango portion of forward curve.

OPEC Production Cuts Only in Compliance With Agreements in March and April

  • OPEC-NOPEC production cuts exceeded 1.8 mmb/d in March and April.

  • Now, only about 1 mmb/d.

  • Reveals inability of OPEC to meet internal commitments.

  • Still, OPEC cuts have been a factor in inventory reductions.

OPEC Production Cuts Only in Compliance With Agreements in March and April

  • OPEC-NOPEC production cuts exceeded 1.8 mmb/d in March and April.
  • Now, only about 1 mmb/d. Reveals inability of OPEC to meet internal commitments.
  • Still, OPEC cuts have been an important factor in inventory reductions.
Brent-WTI Price Difference Because of Middle East Fear Premium & Cushing Buildup
  • Brent premium to WTI price increased $5/barrel between early June and late September.

  • Partly because of Persian Gulf tensions between Qatar and GCC nations.

  • Also because of Kurdish Independence referendum.

  • These combine to create a “fear premium.”

  • Also, Cushing CI has been building since late July.

  • Contango portion of forward curve more favorable than current Gulf Coast prompt

    arbitrage. A temporary situation.

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oil priceRealisation recoveryCrudeRefineryConsumptionGasolineWTIOPECNon-OPEC

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