EIA reported a very bullish oil storage report this week. Products and crude drew higher than normal and the big 4 storage is set to fall below the five-year average in the coming week.
In August, the big 4 (crude, gasoline, distillate, and jet fuel) all drew seasonally higher with products being the bigger driver this month.
Seasonally speaking, products are usually supposed to be flat for August. Part of the draw came from lower than expected refinery throughput, but the other part came from higher than normal demand.
On a four-week average basis, implied demand is at an all-time high with one of the main drivers being strong gasoline demand.
Jet fuel demand on a four-week average basis is also at an all-time high with distillate being the only one lower year-over-year.
As a result, you can see that 2019 demand is on track vs. 2018 despite flooding impacting demand for distillate so far this year.
The demand worries that are arising from the escalating trade war with China has really only impacted NGLs. As we have noted in the past, elevated product imports were the result of reluctant draws in product storage. But last week highlighted what happens if US petroleum net product imports remained steadily higher.
Product imports remain on track year-over-year, but product exports were much higher year-over-year, resulting in the bullish product storage figures.
Given that globally, we are seeing strong refining margins in Asia and Europe, and weaker than normal margins in the US largely due to the compression in Brent – WTI, we think US petroleum product exports will remain elevated. This should see product storage trend more bullishly vs. last year.
In turn, this should push higher refining margins in the US, which should keep throughput higher than last year during September and October.
Lastly, not only will the US be exporting products, but US crude exports should remain elevated going forward as well. As we noted in the past, commentaries surrounding how US crude exports will fall just because Brent-WTI is narrower is completely false. These commentators failed to attribute the export arbitrage to coastal grades.
Looking at the US crude export arbs, US crude exports for November could be as high as ~3.5+ mb/d. This would be a delta of ~600k b/d versus our estimate. And judging by the PADD 2 vs PADD 3 storage, the additional pull on PADD 2 will start in earnest again once PADD 3 storage falls another ~20 mbbls or so.
Our view is that US refineries will be unable to resist the temptation arising from such large spreads. Refineries will opt to export the crude out to make the profit especially if there’s excess in storage before year-end. This could result in the same repeat we saw in 2017 where US crude storage nosedived into year-end. This is precisely what we have modeled.
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Disclosure: I am/we are long UWT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.