Dispensing his usual dose of optimistic crude oil buzzkill, Bloomberg energy strategist Julian Lee points out something troubling to both OPEC, and those who are hoping that the latest dip in oil will finally lead to a sharp rally. He writes that while at first glance, this year’s diminishing U.S. oil stockpiles appear to support the notion OPEC is finally getting the global crude glut under control. Surging exports mean that the market should treat that idea with caution.
The problem is that, as has been the case over the past year, stockpiles aren't coming down because the oil is being used, it's just being moved overseas. And nowhere is this more visible than in the record amount of oil exported overseas.
First, the good news.
In the last week of June, the EIA reported the biggest drop in combined crude and refined-product stocks (including SPR stocks) in four years. In the four months through June - when OPEC crude delivery cuts to the U.S. was expected to show up in lower import numbers - the oil stockpile tumbled by almost 21 million barrels (indicatively, at that rate, it would take two-and-a-half years to get total inventories back to their five-year average level). Regardless, on the surface the drop is even more impressive when one considers that this is the first year since at least 2000 that total U.S. oil inventories have fallen between the end of February and June 30. The average increase in stockpiles over that period has been 53.9 million barrels.
But here a question emerges: what has happened to all that oil?
U.S. demand did hit a record in the last week of June, but more than half of the week-on-week increase came from the volatile "other oil products" category, not core fuels like gasoline, diesel or jet fuel. In fact, Lee writes that gasoline demand has lagged last year's level all year and still shows little sign of exceeding it. Over the weekend, we presented BofA's amazement at the failure of gasoline demand to rise during the peak of driving season, prompting the bank's energy analyst to ask "Where Is Driving Season?", more specifically, "is this year's driving season over before it began?"
A chart from Julian Lee confirms that US driver are certainly not the cause behind the decline in oil stocks.
So if the oil is not being used up domestically, where is it going? The answer: "the oil has been sent elsewhere."
As Lee explains, while the U.S. remains a big net importer of oil (as dreams of energy independence have years to go before being realized) the excess of imports over exports has slipped after the ban on overseas sales was lifted last year.
And here's the punchline: the U.S. exported 149 million more barrels of crude and refined products in the four months through June than it did in the same period of 2016. This was the biggest growth in U.S. crude exports in barrel terms in living memory, some 1.255mb/d year over year.
Indeed, as the EIA reported recently, US crude oil and petroleum product gross exports have more than doubled over the past six years, increasing from 2.4 million barrels per day (b/d) in 2010 to 5.2 million b/d in 2016. Exports of distillate, gasoline, propane, and crude oil have all increased, but at different paces and for different reasons.
Some additional detail: Restrictions on exporting domestically produced crude oil were lifted in December 2015, and in 2016, the United States exported an average of 520,000 b/d. U.S. crude oil exports reached 1.1 million b/d in February 2017, the highest monthly level on record. While Canada remains the largest destination for U.S. crude oil exports, Canada’s share of total U.S. crude oil exports has declined, dropping from 92% in 2015 (427,000 b/d) to 58% in 2016 (301,000 b/d). Other leading destinations for U.S. crude oil exports in 2016 included the Netherlands, Curacao, China, Italy, and the United Kingdom.
Why does this matter? For two main reasons:
First, had those barrels not been exported, U.S. inventories would have risen by 128.6m bbl, hitting never before seen levels.
Second, the surge in U.S. exports is contributing to growing inventory levels elsewhere. According to Lee, stocks in the key European storage hub of ARA, or Amsterdam-Rotterdam-Antwerp region, are up 5.5 million barrels since the end of February, Genscape data show. Separately, while Chinese government data, notoriously unreliable when it comes to oil flow data, show commercial stockpiles almost unchanged between the end of February and the end of May, oil exports to Asia's biggest economy have soared. In the first four months of 2017, 55 million barrels of crude and products flowed from the U.S. to China - more than the first nine months of 2016. Here the 2 billion barrel question is just how much crude is truly stored in China's SPR...
According to London-based consultancy Facts Global Energy, global oil inventories on land are "no lower now than when the output cutback deal was implemented in January." Which means that when one nets out total inventories around the globe, OPEC has failed to make even a dent in net stocks. Worse, the recent reduction in the volume of oil stored on tankers has been entirely offset by an increase in the volume in transit.
Lee's conclusion: "Oil bulls will probably welcome the big drop in U.S. inventories. But it's too early to send the bears into hibernation." As for the alternative, it may be too late for some oil bulls: as we reported over the weekend, one of the world's most famous oil cheerleaders, Astenback's Andy Hall, just threw in the towel last week, warning that any bounce in oil will likely be capped for years to come.