One hundred barrels of oil on the wall, one hundred barrels of oil. You take one down and pass it around and um, now you have, hum, oops! I lost track. Remember that old sing song we sang on the school bus that went on and on until you just lost count! Well that's kind of like our recent inventory reports.
Take the American Petroleum Institute report that showed that US crude supply surged by a whopping 5.87 million barrels. What makes that even more incredible is the fact that this massive crude supply increase happened as imports dropped and refinery runs fell. The API reported crude imports fell by a gigantic 1.4 million barrels per day and crude runs through the refineries actually fell by 40,000 barrels per day. Not exactly the type of numbers that gets you thinking crude supply increase. So why did crude supply rise? Was it a massive drop in demand? Did domestic production surge? Or perhaps some oil molecules found some way to procreate.
Well the truth is that perhaps none of that is true, but what we are seeing here in the inventory report is the impact of tropical storm activity in the Gulf of Mexico in recent weeks. While the oil industry is getting prepared to deal with storms it seems they are less efficient in accounting for supply. The oil barrels we see in this week's report were probably there last week and perhaps even the week before but were perhaps not counted as the industry was dealing with more pressing problems. Time constraints and personnel being pulled in different directions probably means the counting of the barrels perhaps was not done as accurately and efficiently as it is normally done. The storm in other words had more impact on inventory reports that it did on actual supply.
This is a pattern that seems to happen every time we have a storm in the Gulf. The supply reports become erratic for some time because of actual supply delays and production shutdowns but also because of inaccurate counting. Now by me pointing this out is not in any way to be taken as a criticism of the API, the energy industry, or even the Energy Information Agency, but seems to be a fact of life. In emergency situations you might expect that some non-essential things get pushed to the back burner.
This is also important for traders to realize that while these wild swings in supply up and down can move the market, over the long run to get an accurate reflection of the big picture you have to put these reports in the larger context. You may want to take a three week average or more if we get storms to get a better feel for where we are. And where we are is just loaded with oil and product no matter how you want to slice it or dice it.
The API reported that gas supply also increased by a hefty 2.0 million barrels. This came as another report showed that U.S. gasoline demand rose 1.7 percent last week to a six-week high. The MasterCard Inc. Spending Pulse report showed that motorists bought an average 9.57 million barrels of fuel a day in the week ended Aug. 13, up from 9.42 million the previous week's report. Demand last week was up 1.1 percent from a year earlier, the seventh consecutive year-over-year gain. They reported that the four-week average demand last week was 9.52 million barrels a day, up 2.2 percent from a year earlier. The four-week average was the highest in four months. Year-to-date fuel consumption is 0.9 percent above the same period in 2009.
The API also reported that Distillate stocks increased by increased by 2.1 million barrels. Heating oil supply is well above normal for this time of year. We are as well supplied as we ever have been. With the glut of supply across the board the Fed is still the energy bull's best friend.
Without the threat of more quantitative easing, the weight of oversupply would be killing this market. Make sure you are not getting killed!
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at firstname.lastname@example.org