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Biggest Gasoline Glut In 27 Years Could Crash Oil Markets

Distillate tanks

Oil prices are stuck in a holding pattern, waiting for more definitive data on what comes next. OPEC compliance is helping keep prices afloat, but rising U.S. oil production is acting as a counterweight.

A new problem that has suddenly emerged is the record levels of gasoline sitting in storage. The market has already had to digest the fact that U.S. crude oil stocks were rising, and investors have done their best to explain away the trend. But now gasoline inventories are climbing to unexpected heights.

It would be one thing if crude stocks were rising, perhaps because refiners were going offline for maintenance. But if that were the case, then gasoline stocks would draw down on lower refining runs. But if both crude and refined product inventories are going up at the same time, then there should be some reasons for worry.

In fact, the glut of gasoline is now the worst in 27 years. At 259 million barrels, U.S. gasoline storage levels are now at their highest level since the EIA began tracking the data back in 1990.

 

(Click to enlarge)

Part of the reason for the glut, of course, are high levels of production. Although gasoline production ebbs and flows seasonally, U.S. production has been on an upward trend in recent years. Instead of bouncing around in a range of 8.5 to 9.5 million barrels per day before 2014, U.S. production since the collapse of oil prices has steadily climbed to a range of 9 to 10 mb/d. Related: Something Has Got To Give In Oil Markets

 

(Click to enlarge)

But that increase came in order to satisfy rising demand (which, of course, was stoked by lower prices). More demand should have soaked up that excess supply. However, that is where the problem gets worse. Lately, U.S. demand has faltered.

 

(Click to enlarge)

U.S. gasoline demand plunged to just 8.2 million barrels per day in January, and sales were down 4 percent from a year earlier. It was also the lowest level in four years. Weak demand is raising some red flags for the market. Related: This Oil Nation Aims To Colonize Mars

Demand is seasonal, with softer demand in winter months, but this winter’s ‘valley’ is lower than any other since 2012.

The problem becomes particularly acute when you take into account the fact that refiners have actually cut back on gasoline production in recent weeks. Even with lower refining runs, gasoline storage levels continued to rise.

The data is worrying, especially since broader economic data does not point to deep problems with the U.S. economy. Some, including the EIA, speculate that higher prices are cutting into demand. That would be surprising given that prices at the pump are still a fraction of what they were a few years ago.

The drop off in demand could be temporary, with consumption rebounding in a few months. Warmer temperatures tend to lead to more driving, and if demand rises it will halt the climb in gasoline inventories. But even a small hiatus in demand has led to a buildup in storage levels to such a degree that it will take time to bring down. “It kind of ruins your whole year potentially,” Sam Margolin, an analyst at Cowen, told the WSJ. “Demand growth appears to be the riskiest element of the oil equation in 2017, and the rally could pause until driving season.”

The glut of gasoline has led to tankers being turned away at New York Harbor in recent weeks, diverted to ports in the Caribbean. However, even that did not resolve the glut on the U.S. east coast. “Record-high inventories in the region are now pushing prices low enough to turn the typical trade flow on its head,” Bloomberg reports. The east coast typically imports a lot of crude oil and refined products. But refined products are instead heading in the other direction because of the buildup in supply.

If demand does not rebound, then gasoline inventories will rise further. At that point, refiners will be forced to cut back on production, which means a reduction of their purchases of crude oil. Less oil sales means higher crude oil inventories, pushing down prices. Ultimately, that could force drillers to reduce supply. In short, if U.S. demand – and by extension, global demand – does not come through for the oil market, then oil prices could decline this year.

By Nick Cunningham of Oilprice.com

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  • TDRH on February 20 2017 said:
    Not sure of the reason for the drop off in consumption, but assuming larger stocks available are seasonal, the price will drop and consumption will increase. Cannot really tell by your chart, but it seems there is a seasonal reduction in consumption during this period on an annual basis. Could you provide a monthly breakdown for your chart? A 4% reduction over a period YOY would not appear to be a huge outlier. Transports are up, "unemployment" rates are down, incomes are stable or "rising". With a combination of lower pricing, scheduled or strategically scheduled downtime at refineries, this will be absorbed and consumed.
    What do you identify as the root cause of the decline in demand/surplus?
  • mentor depret on February 21 2017 said:
    Perhaps the upcoming Aramco IPO is the reason why oil may not go down.
  • Mr Boompi on February 21 2017 said:
    In a real market, the price of gasoline would drop until sales pick up. You know, traditional supply and demand economics. And I don't just mean the penny drops we see at the gas stations. But the world doesn't work this way anymore. They'll hold on to the oil and gas before they sell it at reduced prices. There's a reason why banking and oil are the most profitable businesses on the planet.
  • Chuckie M on February 21 2017 said:
    This just discusses U.S. inventory levels. I'll be more interested to see how the rest of the world is doing once the new IEA and/or OPEC reports come out (although the data from OPEC and other parts of the world can be suspect). I have to wonder how much U.S. based refiners are stocking up on imported oil and, and also refined gasoline, to front run any potential border tax the new congress might impose. It's hard to know.
  • Dan on February 21 2017 said:
    In the generally scheme of things, gasoline has a very short shelf life.
  • Adam Smith on February 22 2017 said:
    Uber is replacing car ownership, and demand for gasoline. Car ownership is not as much the status symbol as an iPhone. Uber has become a verb. I ubered over the the grocery store.
  • Anarchus on February 23 2017 said:
    The sharp decline in US gasoline demand isn't (quite) yet supported by the miles driven data.

    The most recent monthly data for December 2016 shows a +0.5% increase year-over-year vs December 2015. The gains in miles driven for prior months had been notably larger, so December showed a clear deceleration vs November and October.

    It'll be interesting to see what miles driven look like for January and February 2017, when available.
  • Vic on February 24 2017 said:
    While this might be an issue that causes the EIA and US refiners to worry, I think there might be opportunities for huge income generation for this refiners in West Africa, especially Nigeria. I may not know much about the politics that play behind the sales of refined products outside the United States, the Nigerian market is very Virgin.

    With Urban growth increasing at an astronomical rate yearly, Lagos urban car owners are increasing as well. There are over 19 million people resident in Lagos, with another 500,000 commuting Lagos and other states of the country daily.

    Investors should look into Nigeria.

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