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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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What’s Really Behind The U.S Crude Oil Build

What’s Really Behind The U.S Crude Oil Build

Last week we saw another 10MB massive crude oil build domestically at a time when US production is flattening, refinery capacity is rising and gasoline demand is growing (5% year over year vs. 3% or lower in the recent past). This divergence can be explained in part from the rising import of heavier oil which accounted for 6.1MB (869,000 B/D) of the 10MB build last week. Imports for the week rose a whopping 6.5% sequentially and 8.5% vs. the 4 week moving average!  Once again the chase to create sensationalistic headlines to drive down oil is self-evident as US production rose a meager 14,000B/D and was not the main cause of the rise. So why, month after month since 2014, have imports risen when there exists a “glut” in US oil inventories?

In 2014 according to the EIA, API Gravity (the weight of oil) steadily increased and rose 2.84% which is very significant in adding to the oversupply of US oil. In January 2015 that number rose to nearly 3.1% year over year, according to the latest data point we have from the EIA. Given the recent surge in imports last week the bet it has risen even more. Related: Media Spin On Oil Prices Running Out Of Fuel


Source: EIA (Click Image To Enlarge)

Imports generally have a higher API vs. US lighter produced oil. If refinery capacity is skewed towards processing heavy imported oil vs. lighter US produced oil, as demand rises you will, as a result, be short heavy and long light. Not surprisingly this is exactly what occurred the past 6 months as demand is accelerating for gasoline at a time when US production in late 2014 was rising rapidly. This is only natural because refinery capital expenditures haven’t exactly been front and center for the majors given lackluster US gasoline demand and the fact that only until the last 2-3 years did it become evident that US shale would grow to such an extent. Add on regulations and its no wonder US refineries were slow to adjust to the oil mix. Related: The Top 10 Largest Oil And Gas Fields In The United States

In the next 2 years refineries plan to add 300-400,000 B/D in 2015 and 2016 (3% of daily output) or 125M-130M barrels per year in lighter refining capacity targeting the use of US production vs. imports. That alone will add nearly 2.5MB per week in demand for US oil as an input in the context of stock builds of 10MB recently. It should be noted once again crude oil stock builds occur seasonally until May as a result of refinery maintenance which peaked in February as capacity stands at roughly 90%. Refineries are enjoying record margins so expect that number to rise significantly. That too will assist in reducing oil stock builds as will the 5% year over year gasoline demand as we move towards the seasonally strong driving season. Related: Top 12 Media Myths On Oil Prices

It is just amazing to see the lack of real analysis being done on both Wall Street and in the media especially. In recent weeks the sell side analysts who cover energy have become so complacent that they merely plug in the current strip prices into their earnings models for E&P companies. Not one, except Mike Rothman at Cornerstone Analytics, is questioning the “why?” or “how?” of what is occurring. The 200 or so players who effectively control the oil futures market have changed behavior and expectations as the oil price curve has collapsed. Prices from late 2016 into 2018 are essentially flat in the low to mid 60s, believe it or not, which would essentially bankrupt most of OPEC, US conventional oil, part of US shale and deep offshore drilling. So ask where is the oil going to come from? Yet the madness continues until investors realize E&P companies need a higher price to justify investments in the space.

By Leonard Brecken for Oilprice.com


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Leave a comment
  • Guy Minton on April 10 2015 said:
    That answers a lot of questions I had about the confusion. Good article.
  • Ben on April 10 2015 said:
    Wouldn't conventional oil be the last to bankrupt in that list? Aren't shale costs higher than conventional? Do I have that wrong?
  • cory on April 10 2015 said:
    This author has it wrong and doesn't understand the fundamentals. Imported crude oils do not have a higher API than domestic crude oil production. The three largest fields in the US Permian, Bakken, and Eagle Ford average APIs between 40 and 60.
    The Eagle Ford itself boast mostly condensate and that has been know for quite sometime. The US imports heavy Canadian Oil Sand with is low gravity sour and Mexican Maya with is also heavy. The reason why API is increasing is not because of imports which have lower API gravity, but because Refiners are backing out light sweet crude oils that were imported and replacing them with domestic light sweet with have higher APIs.

    He is correct on the the slower pace of growth in the US, rig count is down quite a bit (250 rigs or so), the bogey in the whole equation is oil well inventories (wells drilled but not producing). The 2015 CAPEX cut has been quite significant and coupled with the behavior of Shale wells which have a steep decline the first year it wont take long for production to fall off and prices rise. I would say we will see $70 by next January.
  • Russell on April 11 2015 said:
    Why is it hard for so many people to see a future less dependent on oil? Do you think your kids are going to use more, or less oil in their future? I think there has been a pretty significant global effort to reduce humanities dependence on oil. Humans, nature, science evolves...improves over time. We're on the verge of fusion power. The world is smarter than it ever has been. I don't understand why it is hard to believe that a whole lot of greedy people need to re-evaluate the price (importance) of oil.
  • george gest on April 11 2015 said:
    Speaking of need to get facts right...

    High API gravity = lighter crudes... diesel is about a 40 or so equivalent

    Lower API gavity = heavy oil... Bunker oil is about a 6 or so

    "Imports generally have a higher API vs. US lighter produced oil."
  • George Gest on April 11 2015 said:
    Buyers will only realize that producers need higher prices when producers stop selling oil for low prices.
  • Peter on April 13 2015 said:
    It's so obvious from this and his previous articles that the author is long on oil and frustrated because the oil price won't go up. He blames EIA for producing biased figures, he blames the media for giving us biased information and next it'll all be a complot by the US government, whereas the oil glut is more than real. If we want to talk about figures... the rig count has remained stable for the last couple of weeks. This is a very bad omen for the oil price because it means that the game's finally becoming serious. The sharp drop in the number of rigs we've seen in February and March was only a charade. The oil companies only shut down their least profitable rigs, hoping that the declining rig count number would push the oil price up, while maximising production at their most profitable rigs in order to keep their market share. That's why EIA data kept showing a rise in production in spite of the rig count drop. But now we've arrived at the moment of truth. The oil companies can't shut down any more rigs because it would lead to market share loss and an even bigger loss of income. They simply have to keep producing as much as they can in order to pay the banks. It's a giant game of chicken and nobody wants to be the first to give in. Survival or bankruptcy. That's why I say that the next EIA report will indicate another steep growth of inventories, as will the ones for many weeks to come. And Cushing is filling up rapidly... and when it will be full in a month or so... BTW, did I mention that Russia and Iraq have proudly announced record production levels, that the Saudis will never close the tap unless US production is on its knees, that Lybian production is rising again, that the secondary OPEC states are secretly producing more than allowed and that soon Iran will flood the world with oil at any price?

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