Canadian imports up, US crude inventories may not fall this summer

When crude was below $40 I was pretty bullish on oil.  Even expecting a possible run into the $60s this summer and certainly by year end.  Still there are some technical indicators that seem to indicate a near/midterm top around $52.  BUT much of that bullishness was predicated on a Canadian oil sands downturn.  For that to happen WTI needed to stay low enough to keep tar sands operations below cash costs throughout this spring's maintenance season to encourage operators to find ways to slow production.  Instead prices shot above $40 allowing oil sands producers like Suncor to lock in prices with hedges just above cash costs.  When you factor in that the refining operations are very profitable, this will keep oil sands production at peak levels and likely growing since the operations become more efficient and profitable with higher production.  Indeed Suncor has promised to increase output this year.  Growing Canadian production will likely spur the Saudis to avoid a freeze deal since one of the highest cost producers can stay online in the mid $40s and even grow production.

During the summer of 2015 US crude inventories dropped about 37 million barrels.  But where did that reduction primarily come from?  The chart below shows the 2015 inventory drop and indicates the seasonal nature of US crude inventory, typically falling through the summer.  Typically refinery utilization is highest through the summer adding demand and helping draw down inventory, but supply must not keep up with demand to get a draw obviously.  

psw01 2016-1-13

Getting to supply.  Canadian oil sands operations had scheduled maintenance during the summer of 2015 likely affecting output, but output was likely affected much more during the summer by a major forest fire near the oil sands operations and fire damage to some of the operations.  In 2016 oil sands maintenance was scheduled for April, so those operations are likely at full strength already and certainly will be this summer.

The chart below clearly shows that through the summer of 2015 imports from Canada dropped 500k to 900k bbl/day throughout the summer.  When the summer Canadian import declines are accumulatd relative to the spring import peak, the total lost imports for the summer was 44.1MM bbl.  But previous years comparisons clearly shows this is not a seasonal drop.  So now after oil sands maintenance and an April Keystone pipeline break in South Dakota caused some production/import declines in March and April, imports are likely to surge back towards 3.3-3.4MM bbl/day.

psw08 2016-4-27

The likely conclusion is the entire decline in US crude inventories was created by a slump in Canadian imports which is not likely to repeat in 2016.   Yesterday and today's price action in crude and gasoline futures has been bullish in the face of a very bearish EIA report.  The only two bullish points were a small US production cut relative to the inventory situation and a significant drop in total imports.   The import drop was largely due to a big drop in Saudi imports, which is unlikely to continue in coming weeks based on history and the large number of tankers sitting in the Gulf of Mexico and elsewhere.  Also a big dip in Saudi imports tends to precede a huge surge.  Apparently a lot of professional money is taking the import dip as a sign of a seasonal trend of lower imports.  But if Canada doesn't bear that load as they did last year.  Who will?  Iran is boosting production, which will keep the Saudis and others from freezing or cutting.  In fact the Saudis have said they would boost production, and if Canada is boosting it's output I don't see the Saudis allowing them to grow market share aggressively as they have continued to do in the face of a weak market.

A look at total crude + petroleum products (refined) inventory indicates a continued surge.  Even last summer's big drop in crude inventory had a negligible affect on total inventories when viewed over the longer term.

psw01 2016-1-13

For the coming week I expect the market to be shocked with a 10MM bbl build in crude+refined products and potentially a 9-10MM bbl build in crude alone as Canadian imports are at full throttle and an expected surge in Saudi imports.

It looks like crude oil prices will face more headwinds this summer than I previously expected and this will become a very bearish scenario for the fall when refinery demand weakens and US inventories have continued to build through summer.