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.
Further Reading: Gasoline Futures Market Rises 45 Cents in 10 Days
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.
Further Reading: Oil Myths & Why WTI Is a Short
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?
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.
Further Reading: The Bernanke Conundrum
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?
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.
Further Reading: China GDP To Hit 6.7%
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!