Wednesday, December 7, 2022

Oil Inventories

The price of oil is falling ($72/bbl as of this writing), even though crude oil inventories have not stopped plummeting. 

Since the peak of 1.2 billion barrels reached when the economy was shut down during the pandemic in the summer of 2020, they have fallen to 800 million barrels in the U.S. - counting both commercial inventories and the SPR.

You'll notice on the chart that in 40 years of history, nothing like this inventory draw has ever happened before.

The chart below shows the current year's inventory draw more clearly:

You can see a draw of 200 million barrels this year. This tells us that the market is under-supplied by about 600k barrels per day, which is roughly as much as one of our Canadian oil majors produces.

If you look closely at the rate of change (the slope of the green line), you can see that the draws slow down when crude oil and gasoline are very expensive, and speed up when they are cheap.

Petroleum products (gasoline, diesel, jet fuel) are going to be getting really cheap at the current price. I would expect that demand will spike, but with a lag. (There will be a travel bonanza, for example, with much cheaper airline tickets than we saw earlier in the year.)

At the same time, the low crude oil price as well as the uncertainty/volatility will discourage investment in production. So, we would expect the rate of inventory drawdown to increase. 

Gurgen Ayvazyan looked at both crude oil and product inventories, and thinks that they are down about 230 million barrels. In other words, that not only has crude oil drawn 200 million but the product inventory is down as well (due to gasoline and diesel).

The EIA keeps claiming that gasoline demand is the same as it was in 2020:

That seems nuts! 

Remember, back in August the Biden administration claimed that this summer's refined fuel demand was lower than it had been in July 2020. (When fuel prices spiked in June, the EIA did not publish their data for two weeks because of a "voltage irregularity," then claimed that demand had fallen to below pandemic levels.)

We knew that the data was wrong because midstream companies and refiners, like Magellan and Valero, were contradicting it in their Q2 2022 results. Then in Q3, we saw refiners reporting that demand for gasoline and diesel was surpassing 2019 levels.

Anyone who leaves his house can see that the EIA is wrong and the refiners and pipeline companies are right about demand. It is higher than 2020 and 2021, and it could plausibly be higher than 2019 (as Valero reports.)

Stacking barrels is not for the faint of heart. If it were easy, everyone would be doing it. Difficult times like this underscore why we put so much thought into energy industry analysis (royalties, pipelines, and low cost producers with long reserve life) and securities selection.

We know that royalty trusts are not going to go bankrupt. We are getting paid less for our products than we should be right now, but the shortsighted strategy of eating the seed corn is only going to result in scarcity and higher prices down the road.

5 comments:

Anonymous said...

Stacking barrels is not for the faint of heart. If it were easy, everyone would be doing it.

this is the same thing value investors and permabears have told themselves over the past decade as they've consistently lost money. "value investing isn't easy; that's why it works in the long run. you just need to stay the course and maintain your ideological purity. underperforming and losing money may hurt, but they demonstrate your righteous nature and commitment to the cause."

maybe oil going down isn't a test of your fortitude and righteousness. maybe it's just a sign that you're wrong.

Anonymous said...

this is the same sh!t value investors and permabears have told themselves over the past decade as they've consistently lost money. "value investing isn't for the faint of heart; that's why it works in the long run. you just need to stay the course and maintain your ideological purity. underperforming and losing money may hurt, but they demonstrate your righteous nature and commitment to the cause."

maybe oil going down isn't a test of your fortitude and righteousness. maybe it's just a sign that you're wrong.

Allan Folz said...

Seasonal patterns have moved and people are extrapolating strength in the off and shoulder season into unrealistic numbers for the high season. (The change is that there is a rush to stockpile ahead of shortages in the high season.) The problem is once storage is full, you are done buying. So it collapses, blowing out the usual seasonal expectation.

Additionally, everyone is conditioned to trade on "events." (A prior CBS post discussed this.) Most growth tech doesn't make money. You can't buy and hold. You'll be diluted into oblivion. To make a return it means average successful investor isn't buying for cash flows and dividends, isn't thinking like an owner, and so on. They have the trader's mentality where everything is a sardine can and the only alpha is from front running the next guy into and out of the can.

So the "event" was a winter energy shortage. That hasn't materialized, storage is full and so everyone races out of the "trade", regardless of the fact that the money by the companies made during the shoulder season is real and will be returned to shareholders in the form of debt reduction, buy-backs, and dividends.

As has been noted, we are in an upside down market where the equities are more volatile than the underlying commodities.

To directly address "sign that your wrong." Has domestic rig count changed? Has SPR destocking paused? Have foreign suppliers come online? Have tanker rates cratered (indicative of falling demand)?

Arrogant anons dunk on a temporary commodity price collapse and the equities following as the result of the marginal, over-leveraged, day-trading, degenerate investors, but ignore that nothing has happened to move the fundamental supply and demand curves for energy in bears favor.

Anonymous said...

as the result of the marginal, over-leveraged, day-trading, degenerate investors

more moralistic cope. this is exactly the embarrassing attitude i was talking about in my first comment.

your problem isn't arrogant anons or degenerate daytraders. your problem is, first, that you do not understand the oil market at all, and second, that you've become wedded to the idea of an impending oil shortage and constantly look for confirmation of that while stubbornly ignoring all contrary evidence.

ignorance and motivated reasoning are a recipe for losses.

Anonymous said...

"Arrogant anons dunk on a temporary commodity price collapse"