One week ago, we looked at an epic build up of gasoline inventories on the East Coast, also known as PADD1, which had slammed the crack spread to record lows for this time of the year, and asked if "This What Finally Drags Crude Oil Lower." We were referring to the collapsing Crack Spreads, which show that something disturbing is taking place for US refingers who are no longer able to "internalize" the massive crude glut.
U.S. gasoline crack spread a proxy for refiner margins, has dropped 34 percent in two weeks. On Wednesday, it hit a five-year low for this time of year below $13 a barrel. That is less than half the crack spread of $28 a barrel at this time last year.
As of today, the WTI crack spread was $13.1, largely unchanged from a week ago.
We then quoted Andrew Lebow, senior partner at Commodity Research Group in Darien, who summarized it best by saying that “PADD 1 is a holy mess. It is very unusual. If a market becomes extremely oversupplied, like PADD 1, they are going to have to cut runs.” That is another way of saying refiners will have to stay shut, which in turn will force crude to build up in various on and offshore storage locations.
Our summary of the strange events taking place in the US refining industry:
with the inventory bottlenecking having reached all the way to the gasoline level, in lieu of refiner buying, crude producers will be forced to start selling oil and dumping prices just to get marginal demand as both onshore and offshore storage is near capacity. Most likely this will happen in the next few weeks, when coupled with the near full Chinese SPR, the slump in Chinese oil demand, the elimination in Nigerian supply overhangs, the resumption of Libyan exports, it will send the price of oil tumbling, and incidentally replaying the summer of 2015 when crude crashed...
One week later, and with gasoline and distillate inventory builds continuing to rise precariously, it appears that this sentiment is starting to permeate the analyst community. This is how WSJ's Market Talk blog describes what is going on:
Inventories of gasoline and other refined products in the US rose strongly last week, weighing on prices today. It's the result of months of cheap crude prompting refiners to buy more crude and run at higher rates to turn it into products. Lipow Oil Associates sees the start of a "death spiral" as "product inventories are high, margins come under pressure, refiners reduce crude runs and therefore the crude-oil glut grows to the point where someone wants to discount" to unload it--inspiring refiners "to kick up their runs again." .
End result: today WTI closed the NYMEX session at its lowest level since May 10. It may be only the beginning.