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Leonard Brecken

Leonard Brecken

Leonard is a former portfolio manager and principal at Brecken Capital LLC, a hedge fund focused on domestic equities. You can reach Leonard on Twitter.

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U.S. Has Too Much Oil. So Why Are Imports Rising?

U.S. Has Too Much Oil. So Why Are Imports Rising?

Despite domestic production declining and demand surging, the EIA reported oil inventories surge by more than 10 million barrels, or more than three times what was expected.

The 10.4 million barrel increase was mostly due to a near record increase in imports of 490,000 b/d (3.4 million barrels weekly) and an adjustment swing of 352,000 b/d (2.5 million barrels weekly) by the EIA. The latter has been a repeated pattern to exaggerate the levels of inventory, a pattern going back to 2015.

Thus, over half of the said increase in inventory was driven by higher imports and an arbitrary adjustment that seems routine by the EIA. Domestic production actually fell by 25,000 B/D in the week ending on February 26. Also gasoline inventories fell 455,000 barrels, or nearly 5 percent, as capacity utilization rose 1 percent. Total gasoline supplied, which is a gauge of demand over last 4 weeks, has risen a whopping 7 percent. Related: Does This "Panic Index" Show A Major Crisis Coming In Oil And Gas?

Now the real question is with U.S. production declining and inventories at record levels, why are refiners still importing at such heights? The 8.2 million barrels per day imported in the week came very close to the record in December, missing by some few percentage points. U.S. commercial domestic crude oil stocks are now nearly 17 percent above last year levels. None of this adds up: We are producing less, inventories are rising, while demand is at records and yet we are using more imported oil? The chart below depicts these very odd phenomena.

(Click to enlarge) Related: Saudis Turn To Capital Markets For $10 Billion Loan

Moreover, most incremental U.S. output is light sweet crude from shale regions, as is the imported oil. The only logical answer that seems possible is that OPEC is undercutting light sweet U.S. crude pricing, so as to incentivize refiners to use imports. So are we then to believe Saudi Arabia that it isn’t at war with U.S. shale?

It is also clear that without higher OPEC output (thus higher imports to the U.S.) domestic stocks in the U.S. would be declining along with production. OPEC increased production by some 1.5 mb/d since oil prices peaked in 2014. The additional Iran supply will come on top of that. In short, it is pretty clear that someone is trying to drive the nail in the coffin for U.S. production.

As always you can catch a video discussion on this and other topics on my channel.

By Leonard Brecken for Oilprice.com

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  • GREG FOREMAN on March 03 2016 said:
    QUESTION ?
    Did the research for this article factor in the fact that SAUDI ARABIA through ARAMCO own one half of the largest US domestic refiner, Motiva, as well as interest two or three other US refineries? In fact, the Saudis are the fourth largest refiners in the world. They are concerned with the US oil market only in so far as they provide oil-their oil-into "their" refineries for sale to the US market. It would be most interesting to get a handle on what amount of increased of imports is attributable to Saudi imports-if any.
  • Raymond Jacques on March 03 2016 said:
    That comment about the Saudis owning U.S. refineries is important.
    The Saudis and other OPEC countries are basically "dumping" their oil onto the States. And I believe that they will continue to do that until the storage areas are overfilled and that local prices collapse.
    Why would the U.S. govt allow another country to deliberately undermine to the point of destroying their own national oil companies, therefore rendering the US much more oil dependent as before to the point of been oil vulnerable.
    The govt should impose Tariffs on such undercut imported oil; or even consider
    reducing imports to only what is actually needed. And I would suggest that the US support Canada before any OPEC country.
  • Mario on March 04 2016 said:
    Someone is overthinking. The price is low so lets buy us much as I can before the price rises again.
  • Scott Beaty on March 04 2016 said:
    You have to import crude to get a feedstock with uniform qualities (and in many cases contains less wax and sulfur) that is acceptable to our refineries as they are currently configured.

    In 2014, Dan Eberhart, the CEO of Canary, LLC, wrote: “shale oil, while low-cost and high-yield, isn’t a perfect feedstock. The quality is highly variable, not only differing from one basin to the next but even within individual basins. Shale oils can be high in solids, including high-melting point waxes that can accumulate and cause equipment blockages. Other issues that can affect shale processing include the presence of hydrogen sulfide (which produces that “rotten egg” smell) and the potential for corrosive salt build-up. Some industry experts even say that the Bakken and Eagle Ford plays are too light: while they yield liquid petroleum gas (LPG), gasoline, and diesel, they don’t have enough “gas oil” and residue to keep the gasoline-making heart of refineries running properly.” (http://canaryusa.com/crude-oil-refinery-primer/3/)

    Unfortunately shale oil will continue to stockpile unless our refineries retool to accept this type of domestic crude. As Greg Foreman points out, that is unlikely to happen at Motiva...
  • GregSS on March 04 2016 said:
    Totally misleading headline.
  • kamakiri on March 04 2016 said:
    Same thing happened about the same time last year. I expect the trend to continue, even as prices go higher.
  • rjsigmund on March 04 2016 said:
    Why Are Imports Rising?
    simple.
    contango.
    buy oil today at $35 a barrel, contract to sell it next year at $44. find a place to store it for less than $9 a barrel and lock in the profit.
  • Steve on March 05 2016 said:
    Imports are rising because (1) Demand is rising, as seasonal thing, but here a little early this year due to the warm weather, and (2) U.S. Domestic production is in steep decline.

    Crude-By-rail shipments & Pipeline Usage suggest that the Baaken Shale's production has fallen 42% from the peak... This makes sense considering the decline curves that Baaken Shale wells are know to have (wells decline 50% in their first 6 months of production - & we are 9 months past a 50% reduction in the rig count).

    On the other hand, the EIA & the North Dakota Oil & Gas Division both insist that production is pretty flat... This does NOT make sense considering the well known decline curves associated with shale oil wells.

    Every day that passes we need more oil (as we approach summer driving season) & we are producing less... Imports will continue to increase, if we can find someone to sell it to us, the surplus that the media keeps talking about does not exists... Prices are about to go up... Prices MUST go up...
  • Tim McCormack on March 06 2016 said:
    The EIA figures just don't add up - remember that the Production figures are 'estimates' based on an 'algorithm...
    Based on this weeks figures ..
    Opening Stock 1202.7
    Production 63.539
    Imports 58.044
    Exports 2.709
    Refinery Inputs 110.964
    Closing Stock (calculated) 1210.61
    Closing Stock EIA Report 1213
  • Gray Mewburn on March 23 2016 said:
    more shale oil is produced than refineries want
    So it goes into the inventories
    The inventories will continue to rise until LTO or shale oil production in USA falls below 2 MBD
    Cheers
    Gray
  • WalterS on August 02 2016 said:
    According to the 2016 ExxonMobil's Outlook for Energy, the USA 'which for decades had been an oil importer, wishes to become a net exporter around 2020'
    http://news.exxonmobil.com/press-release/exxonmobils-energy-outlook-projects-energy-demand-increase-and-decline-carbon-intensit
    But now the US hopes for shale project have failed while the US energy demands are rising in the same manner as we can see in the very China
    http://www.economiccalendar.com/2016/03/26/china-could-increase-oil-imports-by-600000-barrels-a-day/
    To me it means only that the oil price will peak again soon, and the USA tries simply stocking up with cheap oil.

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