Crude Supply Collapse!
The oil market got blindsided after yesterday's Department of Energy supply report. Crude oil had the biggest one week decline since 2003, falling an enormous 9.9 million from last week! Oil prices spiked! Was it sudden demand that just exploded or was there another reason for the big drop in supply? Well a major factor in the drop in supply is the calendar, and by that I am not talking about the weather! I am talking about the yearend tax drawdown. Oil refiners and oil companies that store crude get hit with a tax if they end the year with more inventory than they started the year with. This causes them to get rid of supply to keep that tax money in their pocket.
Yet despite that yearend play, it does not explain the entire amount of this dramatic drop. To explain that you have to dig a little bit deeper and look at where the bulk of the drawdown came from. The Energy Information Agency reported that crude oil imports fell by 1.4 million barrels per day from the week before, which if you multiply that by 7 days, you see why inventories fell so dramatically. A lot of that drop was in the Midwest and it was because of a drop of imports from Canada. And that was due to Enbridge Inc. shutting down its infamous 670,000 barrel per day Line 6A oil artery into the U.S. Midwest for five days for tests.
I call the line infamous because you may remember that this is the same pipeline that leaked in Romeoville, Illinois in September causing a large spike in Midwest gas prices. Enbridge, according to reports at the time, estimated that it would cost up to $60 million to clean up that spill but insurance should have reduced the total charge for the cleanup to $10 million to $15 million.
So the pipeline shut down and the refiners desire to reduce supply help magnify the overall drop. It may also have given the International Energy Agency an overinflated perception of demand. The IEA reported that U.S. crude oil refinery inputs averaged 15.0 million barrels per day during the week which was 71 thousand barrels per day above the previous week's average. Refineries jumped to a hefty 88.0 percent of their operable capacity helping suck down even more barrels.
Implied gasoline demand came in at a stunning 9.1 million barrels a day, a huge jump for December and a stark contrast to the data that we are seeing from the independent MasterCard Survey. Just this week they reported that gasoline demand was 1.3 percent below the same period a year which, according to Bloomberg News, is the largest drop in year-over-year consumption since Oct. 29. Now considering the shape of the roads in most of the country, the spike in demand could have been motorists topping their tanks ahead of the snow storms which means demand will fall again.
Or the demand numbers were skewed as refiners scrambled to get rid of supply. Either way we should see demand drop next week. Of course the market seemed to realize after the shock worries of that this week's EIA report probably won't set the tone for oil as we wind up the year. The market will be for focused on Europe as it fears that another crisis may send the euro lower and the dollar higher taking away the desire to be long crude and other commodities. Overnight we did see some good manufacturing data out of the euro zone but a possible downgrade of Spain's and other Euro zone debt is weighing on the bullish enthusiasm. For traders, though, all of this angst is a good thing as it is providing some wide trading ranges and which gives ample opportunities.
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.