The Way You Used to Do - The Latest Twists and Turns in U.S. Crude Oil Fundamentals

U.S. crude oil fundamentals have shifted sharply in the past few weeks; some changes were fully anticipated, and others more exaggerated than originally expected. U.S. production has risen again to another record-setting high, while a massive decline in refining activity due to turnaround season — and a number of unanticipated short-term shutdowns — has erased a lot of domestic demand for crude. Meanwhile, export volumes out of a few key Gulf Coast terminals are hitting all-time marks. U.S. crude oil imports, affected by international disruptions and refining demand, have dropped like a stone and are nearing 20-year-plus lows. With School of Energy 2019 now in session, it’s a great time to recap what’s been happening over the past month. Today, we look at the summer-to-fall shift in fundamentals, and how it’s impacted overall inventories.

Forecasting U.S. fundamentals can be like trying to predict a powder day in the Rockies in March. The meteorologist can say it’s likely to snow a foot, but you might end up with two feet, or six inches. For crude oil analysts, this summer was relatively predictable. We had near-record refining rates that were strong week-on-week; production didn’t move a whole lot, besides a two-to-three week storm disruption; exports were up; and imports were steady. Exports and refining demand ate up a ton of crude, and from the last week in May until the end of August, U.S. inventories fell by an average of 2.5 MMbbl on a weekly basis. As we wrote in our recent piece on Cushing inventories, all of this data is reported by the Energy Information Administration (EIA) in its Weekly Petroleum Status Report, and we write about and forecast it in our Crude Oil Gusher Report. But just as we got comfortable with those fundamentals, they shifted. As we head into the middle part of fall, refining rates have dropped — as expected, because fall is also turnaround season — but we’ve seen some other notable changes, which we’ll get into today.

You can’t start off a blog on crude oil fundamentals without talking about production. It was a sleepy summer for operators, led by a lot of consternation about when, and how much, takeaway capacity was going to be built out of the Permian. Permian operators didn’t stop growing production, but they did slow their aggressive growth rate to a crawl. Production volumes, as estimated by EIA, stood at 12.3 MMb/d at the beginning of May, and had only risen to 12.4 MMb/d by the end of August — orange bars in graph to left in Figure 1. [Author’s note: EIA began reporting production in 100 Mb/d increments in mid-2018]. Some of that stagnation can be attributed to impacts from Tropical Storm Barry, which hit the Gulf Coast on July 13, and lingered for the better part of a week. Barry forced a bunch of shut-ins along the coast, disrupted some terminal operations, and took 1 MMb/d of crude production offline for two weeks. But overall, production numbers didn’t move a whole heck of a lot this summer.

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