Everyone knows that already gargantuan U.S. oil inventories continue to swell in 2017, but who is the culprit behind the numbers?
Many would pin most of the blame on U.S. shale producers as U.S. oil rig counts continue to rise and output scales higher. Others point to imports, citing the contango—a situation in which longer-dated oil futures trade at a premium to nearby contracts—that provide an incentive to store crude.
But analysts led by Helima Croft at RBC Capital Markets say the usual suspects aren’t the primary drivers. Instead, the blame rests with a seasonal phenomenon that has seen U.S. refiners scale back refinery runs. And that may be good news for oil bulls, since refinery runs are now seeing a seasonal pickup.
Below, the chart on the left breaks down RBC’s view of the main contributors to the whopping 56 million barrel rise in U.S. inventories in the year to date, a jump reflected in the right-hand chart:
RBC says headlines about resurgent shale output aren’t entirely off base. After all, a rise in U.S. production from less than 8.6 million barrels a day in September to more than 9.1 million barrels a day has certainly contributed to rising inventories—about 9.8 million barrels by their arithmetic.
Higher imports have also played a role, likely adding around 17.7 million barrels, they estimate. But softer margins for refiners and seasonal maintenance far outweigh those factors. They do the math:
Refinery throughput so far this year has an average run rate of some 650 [thousand barrels a day] lower than levels seen this past December. Ultimately, softer refining margins and seasonal maintenance have contributed over 54 mb (million barrels) to storage so far this year. Simply put, if refiners had continued to run, throughout Q1, as hard as they did back in December, 54 mb of additional crude would have been consumed rather than stuffed into storage. Under that scenario, stock builds on a year to date basis would be minimal.
They also note that scenario isn’t realistic given refiners seasonal maintenance needs ahead of the start of U.S. driving season in the summer. The point, they said, is to show the outsize influence that refinery season has had relative to other factors.
Expectations that rebounding refinery runs in response to already climbing demand for gasoline would result in a fall in U.S. inventory data on Wednesday were disappointed, with the Energy Information Administration instead reporting a further 1.6 million barrel rise. The news dented a rally for oil futures, though crude managed to hang on to gains.
Crude oil continued to gain ground Thursday, with the U.S. benchmark CLK7, +0.19% and the global benchmark LCOM7, -0.02% on track for further gains. Both benchmarks are trading around one-month highs, but are down more than 3% in the year to date.
A further rise in refinery activity helped offset disappointment in the supply data, with the EIA pegging utilization at 90.8% last week, up from 89.3% the previous week.
By RBC’s reckoning, that’s the right way for traders to look at it.
“The bottom line is that inventories should begin to materially draw down once refinery maintenance season wraps up in the coming weeks and demand picks up on a seasonal basis,” they wrote.