U.S. crude oil storage is filling up with
unaccounted-for oil. There is a lot more oil in storage than the amount
that can be accounted for by domestic production and imports.
That’s a big problem since oil prices move up or down based on the
U.S. crude oil storage report. Oil stocks in inventory represent surplus
supply. Increasing or decreasing inventory levels generally push prices
lower or higher because they indicate trends toward longer term
over-supply or under-supply.
Why Inventories Matter
Inventory
levels have reached record highs since the oil-price collapse in 2014.
This surplus supply is a major factor keeping oil prices low.
Current inventories are 45 million barrels higher than 2015 levels,
which were more than 100 million barrels higher than the average from
2010 through 2014 (Figure 1). Until the present surplus is reduced by
almost 150 million barrels down to the 2010-2014 average, there is
little technical possibility of a sustained oil-price recovery.
Figure 1. U.S. Crude Inventories Are ~150 Million Barrels Above
Average Levels. Source: EIA, Crude Oil Peak and Labyrinth Consulting
Services, Inc.
U.S. inventories are critical because stock levels are published
every week by the U.S. EIA (Energy Information Administration). The IEA
(International Energy Agency) publishes OECD inventories, but that data
is only published monthly and it measures liquids but not crude oil. It
also largely parallels U.S. stock levels that account for almost half of
its volume. Inventories for the rest of the world are more speculative.
Understanding U.S. Stock Levels
Understanding U.S. stock levels should be straight-forward. Every
Wednesday, EIA publishes the Weekly Petroleum Status Report which
includes a table similar to Figure 2.
Figure 2. EIA publishes adjustments and defines them as
“Unaccounted-for Oil.” Source: EIA U.S. Petroleum Status Weekly (Week
Ending September 16, 2016), Crude Oil Peak and Labyrinth Consulting
Services, Inc.
The calculation to determine the expected weekly stock change is fairly simple:
Stock Change = Domestic Production + Net Imports – Crude Oil Input to Refineries
Domestic production and net imports account for crude oil supply, and
refinery inputs account for the volume of oil that is refined into
petroleum products. If there is a surplus, it should show up as an
addition to inventory and a deficit, as a withdrawal from inventory.
But that’s not how it works because EIA uses an adjustment in order to balance the books (Table 1).
Table 1. Calculation of Crude Oil Stock Change. Source: EIA Petroleum
Status Weekly, Crude Oil Peak and Labyrinth Consulting Services, Inc.
The logic is that estimated stock levels in tank farms and
underground storage are relatively dependable and that any imbalance
must be from less reliable production, net import or refinery intake
data.
There is nothing wrong with adjustment factors if they are small in
comparison to what is to be balanced. In the Table 1 example from
September 2016, however, the adjustment is 60 percent of the stock
change–a bit too much.
A one-off perhaps? No, it’s a permanent problem that has gotten worse during the last several years.
Figure 3 shows that crude oil supply and refinery intake of oil vary
considerably on a weekly basis. The balance is cumulatively negative
over time beginning with a zero balance in January 1983. That suggests
that crude oil stocks should be falling over time but instead, they have
been rising.
Figure 3. Difference between U.S. crude oil supply and refinery intake. Source: EIA Petroleum Status Weekly.
The vertical bars show the weekly crude supply from production and
net imports either exceeding the refinery input requirements (positive,
green) or not reaching these requirements (negative, red). The solid red
line is the cumulative.
Between 1991 and 2002, the deficit increased to a whopping 1.3 billion barrels.
Looking at only recent history, an additional gap of nearly 200
million barrels developed as refinery intake exceeded crude oil supply
for most of 2010 through 2014 (Figure 4).
Figure 4. Difference between U.S. crude oil supply and refinery
intake 2002-2016 (12-month moving average values). Source: EIA Petroleum
Status Weekly, Crude Oil Peak and Labyrinth Consulting Services, Inc.
Adjustments were introduced in late 2001 so let’s look at the period starting January 2002 (Figure 5).
Figure 5. EIA adjustments to supply to reconcile stock changes.
Source: EIA Petroleum Status Weekly, Crude Oil Peak and Labyrinth
Consulting Services, Inc.
There are both upward (blue) and downward (red) adjustments. Upward
adjustments resulted in a 420-million-barrel stock increase over the
period January 2002 through September 2016.
All together now
Expected or implied stock changes calculated from weekly crude oil
balance indicate falling inventories from May 2009 through the present.
Yet, EIA makes adjustments to that balance in order to match observed
inventory levels. Rising inventories result after those adjustments are
added to the physical balance or implied stock changes (Figure 6).
Figure 6. Unaccounted-for oil in U.S. storage: the result of
adjustments to the supply balance. Source: EIA Petroleum Status Weekly,
Crude Oil Peak and Labyrinth Consulting Services, Inc.
The green area represents the physical balance (crude production plus
net crude imports minus crude refinery intake). The gray area shows the
unaccounted-for (adjusted) stocks.
The adjustment for unaccounted-for oil averaged about 15 percent from
2002 through 2010. In 2016, almost 80 percent of reported stocks are
from unaccounted-for oil.
When You Have Eliminated The Impossible
There is no obvious solution for the mystery of unaccounted-for oil
in U.S. inventories. Possible explanations, however, include:
1. Crude field production is underestimated
2. Net crude oil imports are underestimated
3. Refinery inputs are over-reported
4. Crude oil stocks are over-reported
or any combination of those possibilities.
Production, imports and refinery inputs are taxable transactions. It
is likely that reporting errors are largely self-correcting over time
because of the financial incentive for government to collect its due.
State regulatory agencies are the source of production data. Their
principal objective is to assess production taxes. It is unlikely that
states would consistently under-estimate production and forego
substantial tax revenue.
Also, producers must state crude oil production in their SEC (U.S.
Securities and Exchange Commission) filings and pay federal income tax
on revenues from oil sales. It seems improbable that the SEC and U.S.
Treasury would consistently accept under-reported production and
associated lower tax payments.
Crude oil imports are subject to both tariffs and excise taxes so it
seems unlikely that the U.S. government would consistently fail to
identify under-payment of those revenues.
Similarly, taxes are involved when refiners buy crude oil and sell
refined products. It seems improbable that they would over-state those
transactions and consistently over-pay associated taxes.
The principal components of supply balance—production, imports and
refinery intake—are shown in Figure 7. In a general way, increased
production and decreased imports tend to cancel each other out. Refinery
intake has increased since about 2010.
Those trends determine the physical balance or implied stocks. The
inescapable conclusion is that implied stocks (in light blue) are
substantially less than reported stocks (in gray).
Adjustments for unaccounted-for oil are unreasonable and out of
proportion to the underlying factors that determine crude oil stock
levels.
Figure 7. Components of unaccounted-for oil in U.S. storage. Source: EIA Petroleum Status Weekly, Crude Oil Peak and Labyrinth Consulting Services, Inc.
It would be speculation to blame anyone for this apparent statistical
disaster. Nevertheless, there is a problem that has major implications
for oil price and the reliability of reported data.
In several of his Sherlock Holmes mystery stories, Arthur Conan-Doyle
wrote, “When you have eliminated the impossible, whatever remains,
however improbable, must be the truth.”
We have not eliminated any impossible explanations. We have, however,
eliminated the three most improbable explanations for unaccounted-for
oil.
The truth—however improbable—is that inventories are probably much lower than what is reported. Source.
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