Posted on 12/07/2015 4:49:07 AM PST by thackney
Record US crude oil inventory levels in 2015 reminds us of a pig crossing paths with a python. The pig is consumed by the snake, bulging in the reptile's stomach as it goes through the digestive process, and is a handy parable for oil markets.
In 2015 US refineries took unprecedented bites out of the US crude oil glut that was largely the result of higher domestic production levels. But while these python-like refineries have increasingly been built to take a more variable diet, the pigs are getting larger and possibly outgrowing the refineries' ability to digest the upcoming portions.
If we follow the path of the American oil python as it chomps down on the 2015 crude glut, we're left with questions about what it means for 2016. Will the fat oil glut prove too big for the mighty refinery python? Or will the refining sector just end up with a New Year's hangover and a bad case of indigestion?
Assessing the prey
The reticulated python of Southeast Asia is known to swallow its prey whole after squeezing the life out of it. However, before starting the swallowing process, the python must wait for the right opportunity to ambush its prey, wrap around it and clench hard.
The refinery python found easy prey in 2015. US crude oil production has grown so much that it is higher than the rest of the global incremental growth combined. Total US crude stocks reached record highs in the first quarter of 2015, resulting in record refinery utilization levels. In just the PADD III region along the US Gulf Coast, year-to-date crude oil stocks jumped 19% compared to year-ago levels to stand at 230 million barrels - or 27% higher than the five-year average.
For the American refiner, the rising production and lower prices came as a feast as they managed to squeeze out proportional superior refining netback margins. Netback margins for LLS and Mars in the US Gulf Coast doubled year-on-year when analyzed as a percentage of the crude's outright value.
To make a comparison, after lean years of hunting for mangy rodents and the occasional stray cat, the python stumbled on a porker practically asking to be devoured. So the python obliged as US refineries took more crude volumes into their daily diet. Refinery inputs of crude in PADD III are up 10% when compared to 2010 and 7% higher than the five-year average.
The big question for many in the oil industry this summer was whether the 2015 catch was actually a pig or something more fierce and destructive - like this alligator swallowed by a python in Florida.
Swallowing the pig
The 2015 crude supply is shaping up to be a formidable feast thus far, and although the python has become quite effective at digesting the meal, the food is piling up. PADD III crude oil stocks during the fourth quarter are 29% higher than year-ago levels and are on the way to beat the 2015 record highs. At a modest 13% growth, we could expect crude stocks in PADD III to reach 280 million barrels by the second quarter of 2016.
Although the crude glut reached a record high in Q2 2015, it has not translated into a comparative refined products glut. Combined refined products stocks in the US Gulf Coast reached 275 million barrels during Q2 2015, and although it is significant, it represents just 5% more than the five-year average and it is actually marginally less than 2010 levels. So what gives? Where did the pig go?
Make way for a bigger snake
US refined products exports in 2015 have more than doubled since 2009 and are 8% higher compared to year-ago levels. But crude oil stocks continue to build.
The good news for the American economy is that both US refiners and drivers have increased their capacity to consume in 2015.
"Luckily, the python appears to be getting fatter, with total US refining capacity expected to grow another 300,000 b/d year-on-year in 2016," said Tony Starkey, manager of energy analysis at Platts unit Bentek Energy.
US gasoline demand went from strong to stronger in 2015, as consumers leapt on lower gasoline and diesel prices and purchased larger vehicles. Refined products demand growth also appears strong in the world's key growth regions: India and China.
"The real question is whether demand can continue to grow at the breakneck speed at which it did in 2015, or was this largely a one-off boost due in large part to the elastic demand for oil?" Starkey said.
It appears that US consumers are not the only ones paying attention to prices at the pump. Global investors are putting the brakes on capital spending that would otherwise bring additional crude volumes online.
If we see less crude oil on the market in 2016 and continued strong demand growth, we may see the market draw closer to a new supply-demand balance. The fat python may be here to stay.
I know how to solve this! Sell of the Strategic Petroleum Reserve to pay for more free stuff!
Strippers in South Dakota are so desperate they are taking IOUs.
I thought that was our congress and president’s plan?
$305B highway bill taps Fed, oil reserves
http://thehill.com/policy/transportation/261693-highway-bill-agreement-taps-fed-oil-reserves-custom-fees
12/01/15
The $305 billion highway bill announced by lawmakers on Tuesday includes approximately $70 billion in revenue from areas other than the federal gas tax that is traditionally used to pay for transportation projects.
The 1,300 page measure, which was unveiled days before a Friday deadline for renewing transportation funding, relies largely on revenue from reducing interest rates paid by the Federal Reserve to large banks, selling oil from the Strategic Petroleum Reserve that is used to prevent energy crises and increasing fees for customs processing.
The funding will be used to offset a transfer of about $70 billion into the Department of Transportation’s Highway Trust Fund to close a gap that is estimated to be approximately $16 billion a year until 2020.
Interesting that the Williston Basin is split between two districts. (PADD III and PADD II) Bakken production comes from both.
Sell low, buy high!
This was supposed to pay for infrastructure improvements at the SPR enabling distribution in the event of a crisis, but I am not sure that part made the final cut.
2 & 4
The designation is pretty old.
During World War II the Petroleum Administration for War, established by an Executive order in 1942, used these five districts to ration gasoline. Although the Administration was abolished after the war in 1946, Congress passed the Defense Production Act of 1950, which created the Petroleum Administration for Defense and used the same five districts, only now called the Petroleum Administration for Defense Districts.
https://www.eia.gov/todayinenergy/detail.cfm?id=4890
Not everyone is stupid.
China expected to double strategic oil purchases next year
http://www.reuters.com/article/china-oil-reserves-idUSL3N13J1DO20151204
IIRC, at that time the oil fields of central Montana were known, and the Powder River Basin oil production, too.
Williston Basin oil was not discovered until 1951 in the Clarence Iverson #1 well in Williams County, ND.
The map area classifications used state lines and not geologic province boundaries, and antedated that discovery.
When first created, it was about controlling people, not oil production.
True, that. I just wish we didn't have such fools running the show.
I am ever haunted by that commercial with the Chinese laughing at the comment "...and that is why they work for us now."
Yes, it is and I was being sarcastic. The ideal time to dump oil onto the market is during a glut, dontcha know.
” . . . selling oil from the Strategic Petroleum Reserve that is used to prevent energy crises and increasing fees for customs processing.”
Selling oil purchased at $100 per barrel for $40 per barrel Wall Street loves a sucker. Buy high and sell low.
This amounts to buying high and selling low...
Wisdom is not a characteristic of the federal government.
PADD
First time I’ve ever heard of PADD. Do they actually “do” anything useful, or are they just “bean counters”??
You're right, of course.
I suppose Congress looks at the SPR and sees a pool of cash. Unspent cash.
That’s gotta be torquing Obama’s jaws - an “oil glut” despite his efforts to screw us with “necessarily skyrocketing prices”...
“Not everyone is stupid.
China expected to double strategic oil purchases next year”
Although I also think it’s stupid selling any part of the reserve at cyclical lows, you cannot compare China & the US. China has to import virtually all its oil, where we have large reserves in the ground.
It really is just an accounting division for the statistics, if I understand it correctly.
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