Crude oil inventories decline at record rate
The national average diesel fuel price increased four cents to $3.90 per gallon, 12 cents higher than last year at this time.
The Trucker News Services
The Energy Information Administration of the U.S. Energy Department reports that the country’s commercial crude inventories are declining at a steep and record rate.
Crude oil inventories, which had been above their five-year range all but one week since March 2012, fell by a record 27 million barrels over the past three weeks and are back within the five-year range.
Despite the record draw over the past three weeks, average 2013 inventories through July 12 remained 6 percent above the same period last year and 11 percent above the five-year average, according to the EIA’s most recent report.
Healthy U.S. inventories have been largely the result of high inventories in the Midwest (PADD 2) which, despite recent declines, remains 22 percent above the five-year average for the week ended July 12, the agency noted.
Inventories declined for three reasons: (1) an increase in U.S. refinery runs; (2) a decrease in crude oil imports; and (3) a reduction in price for future months on the West Texas Intermediate (WTI) futures price curve, which has encouraged reducing inventories rather than buying crude at current market prices.
The significant inventory draw was caused primarily by an increase in already high refinery demand for crude oil, including additional demand resulting from the restart of a 250,000-barrel-per-day crude distillation unit at BP's Whiting, Ind., refinery.
Total U.S. refinery utilization increased 2.6 percentage points between June 21 and July 12, reaching 92.8 percent. Much of this increase is attributable to the Midwest sector, where utilization went from 87.9 percent to 94.6 percent over the same time, an increase of 6.7 percentage points.
PADD 3 or Gulf Coast region utilization also rose over this period. At 95.4 percent for the week ended July 12, it was 2.3 percentage points above its June 21 level.
Crude runs on the Gulf Coast have been buoyed by strong distillate margins. The 533,000-barrel-a-day increase in U.S. refinery net crude oil inputs pushed refinery runs to their highest level since 2005.
On the supply side, lower crude oil imports have increased the draw on stocks to meet demand from increased refinery runs. Crude oil imports into the United States for the weeks ended June 28 through July 12 averaged 649,000-barrels-a-day less than the three-week period ended June 21.
Imports into the Gulf Coast and East Coast averaged 671,000 barrels a day and 219,000 barrels a day less, respectively, compared to the previous three-week period. Declines were led by lower imports from Saudi Arabia and Venezuela, which each dropped by about 25 percent over the three-week period ended July 12 compared to the prior three-week period. This accounted for a 630,000-barrel-a-day decline.
While year-to-date through July 12 U.S. imports of Canadian crude oil were 5 percent above 2012 levels, flooding in Alberta along with processing facility outages limited imports from Canada since June. As of July 12, Canadian imports are down 10 percent (278,000 barrels a day) from their 2013 high in mid-April. Lower Canadian supplies have a significant impact on PADD 2 inventory levels, since most Canadian crude comes to the United States via pipeline into the Midwest.
Higher crude runs in the Midwest and easing crude oil transportation constraints that are allowing more domestic crude oil to reach U.S. Gulf Coast refineries have pushed the WTI futures curve into backwardation over the next several months, the EIA report stated.
This creates an incentive to sell crude from inventory. On June 20, when the contract for August delivery became the prompt futures contract, prices for the next two months fell, resulting in the first consistent period of WTI “backwardation” since November 2011.
In addition, on July 10, the prompt contract (August) premium over the second month reached $0.90 per barrel, the highest level since 2008. Spreads between the front month and longer-dated contracts are even wider. As of July 10, the December 2013 contract was trading at $4.23 per barrel below August.
On the Gulf Coast, inventories have fallen 16.3 million barrels since June 21, and in the Midwest inventories are down 6.8 million barrels. At Cushing, Okla., the delivery point for the Nymex WTI futures contract, stocks fell 2.7 million barrels the week of July 5 and another 882,000 barrels the following week.
Trade press reports indicated that crude production that was being delivered to Cushing storage is now being delivered directly to the Gulf Coast, thus reducing supply at Cushing.
In addition, a syncrude processing facility in Canada was reported to have been out of service, reducing regional supplies of light sweet crude oil. Although average 2013 Cushing inventories remain 25 percent above 2012 levels, stock levels have declined for much of 2013 and are now slightly below their 2012 level.
Along with pipeline infrastructure changes that have allowed crude to bypass Cushing, rail is facilitating the movement of crude oil directly from the Bakken formation in North Dakota to refineries on both the East and West coasts.
In addition to pushing the WTI market into backwardation, these developments are helping to raise Midcontinent spot prices, narrowing the spreads between North Sea Brent and WTI and between Bakken and Light Louisiana Sweet (LLS) crude oils. However, the resumption of syncrude imports and an anticipated refinery switch by BP Whiting to heavier Canadian crude later this year could take upward pressure off prompt WTI prices, flattening the forward curve, the report predicted.
The national average diesel fuel price increased four cents to $3.90 per gallon, 12 cents higher than last year at this time. The East Coast, Gulf Coast, Rocky Mountain, and West Coast prices all increased four cents, to $3.92, $3.84, $3.87, and $4.04 per gallon, respectively. Rounding out the regions, the Midwest price is up two cents to $3.88 per gallon.
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