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Dian L. Chu

Dian L. Chu

Dian L. Chu, is a market analyst at EconMatters.EconMatters  is made up of a team of financial and market analysts who research, analyze, and write…

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Why are Oil Inventories Down if Production is Increasing and Demand is Falling?

Why are Oil Inventories Down if Production is Increasing and Demand is Falling?

The 20 Million Drawdown in a sluggish economy

The last two weeks oil inventories fell by a record 20 million barrels, this event has never happened in 30 years of historical data. So what the heck is going on here? It is not the case that this is the best economy in the last 30 years. It sure isn`t the case that Americans are using more fuel right now compared with any other time period during the last 30 years.

Peak Demand Era

In fact, the US market is maturing and using less fuel these days for several reasons like alternative energy, higher fuel efficiencies, fuel blending requirements, and a struggling economy with the highest rate of population on food stamps.

Supplies at Record Highs

Sure refiners are running at their highest rate of the year in the 92% range, but that is all normal for this time of the year. Yet this two week drawdown has never happened before, and curiously it happened as supplies were at record highs.

Increase in Domestic Production Matches Reduction in Imports

Something just doesn`t add up here. It appears there is some funny business going on in the oil market once again. What makes the drawdown even more suspicious is that domestic production was very high the last two weeks at 7.2 and 7.4 million barrels per day, with imports down to 7.4 and 7.5.

The imports are low compared to last year at this time which was 8.6 million barrels for the same week a year ago. At first blush that is the reason for the drawdown, just take a million barrels per day times seven days in a week, and it adds up to a 7 million barrel weekly deficit.

But then you compare domestic production to last year and it is up 1 million barrels per day compared to this time last year. So the trend of replacing Saudi oil with Domestic oil continues on its natural course given the recent industry trends.

Where is Saudi and Nigerian Oil Going?

A couple of points worth noting: What is Saudi Arabia doing with their extra capacity now that they are no longer sending this oil to the US? It sure isn`t going to China, it is not like their economy is booming right now. It sure isn`t Europe as they are a mature market with automobile sales at 20 year lows and high unemployment!

I know that there is a bunch of Nigerian Oil just sitting on tankers waiting for buyers because the United States isn`t importing as much of this oil given the higher quality domestic production, but what about Saudi Arabia? What are they doing with the glut of oil that used to go to the US?

The Real Reason Tanker Rates are Rising?

Related articles: British North Sea Oil Decline Opens Window for Smaller Producers

I noticed that tanker rates have been rising; is the real reason they are rising is that a bunch of oil is being taken off the market and stored in ports around the world to artificially raise prices. This wouldn`t be the first time this trading trick has been utilized by big players in the industry! It is not like Saudi Arabia has reduced production in a significant manner to account for where their excess capacity that used to go to the US in now being marketed.

Managing the Market

But the trend is clear if Saudi Arabia was sending the same amount of oil here with the increase in US domestic production currently, oil prices would be much lower. So they are trying to manage prices and the supply glut by trying to offset the increase in US domestic production by exporting less to the US.

For example last June 22, 2012 the US imported 9,118 (million barrels per day) for that week ending period, and the US has imported up to 11,153 (million barrels per day) for a July period as recently as 2010.

The other question is what does Nigeria do with all their extra oil right now? This oil has to hit some market at some point given some degree of reduced market price, right? Nigeria badly needs the revenue, and is it not like they can just put this oil back in the ground.

Lack of Huge Product Builds

The other interesting oddity about the drawdown is that the product supplies didn`t have huge builds the last two weeks. For example last week distillates had a 3 million build, and gasoline had a 2.6 million drawdown. The prior week both products had moderate drawdowns. The conventional wisdom is that if refiners are ramping up production, they are drawing from crude oil, and building up product`s inventories.

So a 92% refinery utilization rate is normal for this time of year, but it is apparent that given the numbers not all of this oil went towards refining products. So where did it go? That is the big question!

The Math Doesn`t Add Up!

Because if you add up the numbers it just doesn`t equate: Take domestic production for two weeks, add the import numbers for two weeks, add the refinery inputs for two weeks, the refinery outputs for two weeks, and the draws in product inventories for two weeks, there is no way to account for this record breaking two week draw in oil supplies.

A lot of this oil isn`t being captured in the refining supply chain statistics, so the oil went out of storage, the official storage numbers went down, but it wasn`t all processed into products, so where is it being stored?

It is obvious that something is amiss here in the data as the US didn`t suddenly allow for large exporting of oil, not that there would be a market for it anyway under current global conditions! My best guess is that this oil is being moved from the official storage facilities that have reporting responsibilities to other storage facilities of some kind that aren’t captured by the reporting requirements.

Purposeful Manipulation or System Reporting Glitch?

Related articles: Is it Time to Stop Worrying about Peak Oil?

Whether this is for explicit purposes of manipulating the inventory numbers to affect price is another question, or whether this is just a system which has flaws in accounting for oil being moved from one storage facility type to a different kind of storage facility is another possible explanation.


Oil Market is Well-Supplied!

But the main takeaway is that the recent drawdowns don`t reflect any change in supply and demand fundamentals in the market. This is an accounting anomaly whether for purposeful manipulation or system failure of the data.

Two Sides to every Transaction: Excepting Fake “Accounting Trades”

Some analysts have been talking about another big drawdown for this week because the market is in backwardation. The rationale is that why would you hold onto oil if you are going to get a lower price next month, so sell all you can now!

Well, what about buyers? Every transaction has two sides: Why would a buyer acquire oil this month when it can be acquired next month at a cheaper price, and in two months it is even cheaper? It is not like there is any shortage of oil right now!

System Constraints on Volumes

If we experience another large draw something funny and potentially illegal is going on in the oil industry because there is no way this oil is being used to manufacture petroleum products. The system just cannot  handle these type of volumes in three weeks without domestic production or oil imports dropping off a cliff which they haven`t!

History of Oil Market Shenanigans

Ergo, oil is either being taken out of storage and stored on tankers to artificially have the appearance of tighter supply markets, and thus influence price, and will be dumped back on the market at a later date; or some other market shenanigan is taking place where this oil isn`t making its way into the refining supply chain.

It wouldn`t be the first time traders found a way to game the system in energy markets. There is a long and storied history of just such behavior from Enron to J.P. Morgan. But something just doesn`t add up right now in the oil market!

By. Dian Chu

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  • mark chambers on July 17 2013 said:
    There are no schenanigans here, those excess are actually being consumed by the saudi consumer. The oil is refined close by and sent right back to the kingdom. You see, the saudis have no internal or external debt, as they heavly subsidize the growing driving population. In order to do this without indebting themselves they had to get at least $92/bbl, and that was 5 years ago. Since then they have grown and that figure has risin, as it rises, everyone elses price rises unless world consumption decreases(which is not going to happen because of the 5 years of the hyperinflated dollar, everyone has them to spend). So it's rather simple to see how a decline can occur, as to where the drawdown went, well who do we owe the most money to?
  • Jeffrey J. Brown on July 17 2013 said:
    The 2002 to 2011 rate of increase in annual Brent prices was 17%/year. Brent was flat in 2012, and then down somewhat in 2013.

    It seems very likely that a major contributor to recently flat to down global crude oil prices was the large increase in US oil production + a continued decline in US oil consumption, but as noted below it's going to get harder and harder for US oil companies to just maintain current US crude oil production.

    Following is my brief summary, in a bullet points format, of the Global export market and US oil & gas production:

    Global Net Exports

    EIA data show that what I define as Global Net Exports of oil (GNE) have been below the 2005 rate for seven straight years, with the developing countries, led by China, consuming (so far at least) an increasing share of a post-2005 declining volume of GNE.

    Available Net Exports

    I define Available Net Exports (ANE) as GNE less Chindia’s Net Imports (China + India). ANE fell from about 41 mbpd in 2005 to 35 mbpd (million barrels per day) in 2012, an average annual decline of close to one mbpd per year in the volume of exported oil available to importers other than China and India.

    I examined this topic in the following paper on what I call the Export Capacity Index (not yet updated with 2012 data):


    US Crude Oil Production

    While the current increase in US crude oil production is very helpful, the steady increase in the decline rate from existing production means that the US oil and gas industry is facing enormous challenges in just trying to maintain current production levels, and in all likelihood we will continue to see an “Undulating Decline” pattern in post-1970 US crude oil production (currently US crude oil production is about 25% below the 1970 peak annual rate).

    As noted in the following article, if we assume a probably conservative average year over year decline rate in existing US crude oil production of 10%/year from 2013 to 2023, the US oil industry would have to replace, over a period of 10 years, the productive equivalent of 100% of current US crude oil production, in order to maintain the current US crude oil production rate:


    US Natural Gas Production

    A recent Citi Research report puts the current year over year decline rate in existing US natural gas production at about 24%/year, which implies that the US has to replace virtually 100% of current US natural gas production in the next four years, in order to maintain the current US natural gas production rate.
    Note that a 24%/year decline rate in existing natural gas production would require the industry to put on line the productive (peak rate) equivalent of 30 Barnett Shale plays from 2013 to 2023, in order to maintain the current US dry natural gas production rate of 66 BCF/day.

    Bottom Line

    The bottom line for developed net oil importing countries like the US is that (so far at least) we are gradually being shut out of the global market for exported oil, via price rationing.

    GNE = Combined net exports from top 33 net oil exporters in 2005
    ?Net Exports = Total petroleum liquids + other liquids production less liquids consumption (EIA)
  • Kaul on July 17 2013 said:
    @ Jeffrey

    Your long winded attempt to repute this article and reference to peak oil, demonstrate that you are either one of the peak oil dinosaurs ( you know the ones who created all that oil in the first place ;) or an insider currently benefiting from the shenanigans. The reference to nat gas decline rates is particularly amusing, maybe you can quote Art Berman also.
  • Jeffrey J. Brown on July 18 2013 said:

    I plead guilty to relying on a quantitative analysis of global export data and US production data, and what the data show, at least through 2012, is that developed net oil importing countries like the US are gradually being outbid for access to a post-2005 declining volume of Global Net Exports of oil (GNE). At the 2005 to 2012 rate of decline in the ratio of GNE to Chindia's Net Imports of oil, in only 17 years the Chindia region alone would consume 100% of GNE.

    Regarding Art Berman, it seems that more and more analysts, e.g., the recent Citibank Research report, are basically confirming Art's work.

    Regarding decline rates from existing production, this is why Peaks Happen. To not "believe" in production peaks, one has to believe that the sum of discrete sources of oil that peak and decline will show a perpetual increase in production.
  • Erika on July 21 2013 said:
    Has anybody considered the drawdown in crude was due to the fact one of the biggest suppliers of crude to the us is Canada and with the floods in Calgary shutting down their pipelines?
  • Others on July 21 2013 said:
    USA is neither the only consumer, nor the only producer.
    USA consumes only 20% of the World's Oil, so what happens to the other 80% and how is stored should also be taken into account. Definitely Saudi and Nigerian Oil is exported to other countries, part of it may be stored some where.

    So there are 4 factors at work.
    Storage Increase
    Storage Decrease

    And every day 100,000 new vehicles were sold Worldwide and expect the prices to go up. Besides, the cost of Shale and Sands oil is very high because of depletion or upgrading cost.
  • mtan on February 14 2015 said:
    The new storage supply dump is very deep; it is called the ocean and who among you would be surprised to find out that tankers are deliberately dumping their loads in unseen and deep locations?
    It has been happening for years and there is no such thing as "peak oil", for that would assume or presume that all the known oil deposits are known. It also assumes that oil takes millions of years to form, which is another lie altogether.

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