Crude + Petroleum Products Inventory Set to Make New Record Highs, Crude Bulls Lookout

Total Crude + Petroleum Inventory

Data Source:  EIA

psw01 2016-1-13.xlsx

Total crude + Petroleum Products popped 3.2 million barrels last week and is only 2.5 millions barrels below the record high of 1.371 billions barrels set the week of April 29, 2016.  The chart clearly shows summer into fall has a history of inventory builds, with huge builds continuing through the winter and spring of 2015/2016.   A pattern similar to 2015, just slightly weaker is set to repeat.  I expect total inventory to build to at least 1.4 billion barrels and possibly as high as 1.42 billion barrels.  This can be seen by using the 2015 inventory level normalized to 2016 through June 3 as a projection line.

In the past inventory levels would fall late in the year.  Studying the data it appears this was typically driven by drops in crude inventory driven by reduced imports from Saudi Arabia.  It appears the Saudis were propping up the markets during weak demand times.  However, it is clear that in 2014 and 2015 they did not do this.  I expect that to remain the case in 2016 as Canadian oil sands producers have shown a drive to rapidly expand production even in the face of very low prices this past winter.  Canadian imports shot above 3MM bbl per day to around 3.4MM bbl/day in January.   That compared to a peak of about 2.8MM bbl/day in January 2014, which implies about a 20% YoY increase.  A conservative projection puts Canadian imports at about 3.5MM bbl/day by July/August and 4MM bbl/day by January 2017 is not out of the question.  The Saudis will not want to give up this market share.  Indeed I fully expect many producers will get excited about dumping crude and refined products in the US now that crude is over $50 and Canadian imports are rising.  With no OPEC agreement to cap production, producers will be forced to compete, driving down prices severely again, before there can be any serious talk of cooperation again.

One of the big problems that has been created this year for OPEC cooperation is the high prices have now given high cost producers in North America a great chance to expand and improve their hedges into spring of 2017.  Unlike this past year I expect they will put in a solid floor around $45 so they do not lose money should prices drop into the $30s as they did last year.  Most producers were seriously hurt because their collars didn't protect them below the $40 to $46 range.

I'm short oil and heating oil in my various accounts with DWTI and sold Calls on USO at $11.50 $12, and $12.50 in every available week out to January 2017.  I'll continue to add to those covered calls with weekly profits and as options expire, possibly into February 2017.  At this point I expect to remain generally short oil, buying a few of the dips at key support levels until February 2017.