Wall Street and the media have been awash with predictions of ‘oil glut’

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Listening to what people responded to the past couple of years, I expect higher oil prices the next 6mos.

In the oil industry, the 1Q shutdown period is well known, but not it seems by Wall Street. The 1Q of each year is when refineries are shut down for catalyst changes to produce summer fuels which are mandated by the EPA. It is also a good time to do maintenance and repair. The chart of US Refinery Inputs reflects the cyclical impact of 1Q shutdowns. In preparation gasoline inventories need to be built ahead of time so that the flow to consumers remain constant. What we see then is a build in gasoline inventories prior to shutdown which falls rapidly as the shutdown moves into full swing.  Crude inventories rise sharply in the middle of the shutdown. This pattern is easy to see the charts.

The current period has been longer and deeper. Refinery Inputs are at their lowest relative level since 2010. This has resulted in higher builds in crude inventories. Gasoline inventories have already begun their historical drop.

Wall Street and the media have been awash with predictions of ‘oil glut’. The rise in crude inventories this period has only poured fuel on the fire. Some continue to forecast oil prices falling back to 2016 lows with claims that no one is doing enough to reduce the flow of crude. One would think that E&P companies were being run by ‘madmen’ intent on self-destruction.

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The facts as shown in the charts that:

1)      US Export of Refined Products has risen consistently by 300% since 2010.

2)      US Oil Production + Imports has risen consistently as a result to keep inventories at levels necessary to meet consumer demand

If there were an ‘oil glut’ or too much Refined Product on the market, there should be a dip in the charts indicating a need to slow throughput to rebalance supply/demand. What we see is a continuous uptrend which is in line with global demand. No one discusses this! All the discussion is about US inventories. Nowhere, is there any acknowledgement of the 1Q shutdown process having an impact on crude inventories.

We are in the early stage of restarting refineries. Crude inventories should see a sharp fall as a result. Those who have been calling the ‘oil glut’ out of control will be in for a shock the next 6mos as inventories return to trend. Oil prices are likely to rise as a result.

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