CRUDE STOCKS TROUBLE: SOME ARE GROWING, OTHER COME SHORT
By mid-February the commercial stocks of crude oil in the US reached another peak of 518 mln barrels. The stock exchange was taken by surprise and went a bit crazy, the oil bears tried to push WTI price below $52.5, but were defeated. It’s time to clarify what kind of stocks they are, what their fluctuations show and what they conceal.
1. BRIEFLY ON TECHNOLOGY
Because of the term “commercial” the wide audience has a strong belief that this is spare oil, which can be sold or processed into fuel anytime. This is not so. Theoretically, this oil can be used, but not all of it and some of it had better not be used at all. I’ll demonstrate this with a simple example.
In the US there is a large trans-Alaska pipeline 1,288 km long. Its volume exceeds 9.5 mln barrels and it takes oil 20-30 days to go from the entry to the end. During this period it belongs to the transport company and the later reports it to the EIA. This is how the commercial stocks of 2.5 to 6 mln barrels originate. The same amount of oil is in the tankers, which carry it further to the South.
Can we pump this oil out of the pipeline and use it? Theoretically we can, but the pipeline would stop. To resume pumping we would have to add oil. That is why specialists call it not commercial, but process oil, because the pipeline can’t work without it. By the way, the total length of the main oil pipelines in the US is over 110 thousand km. According to my very conservative estimates (indirectly proved by the statistics), the total volume of process oil in them amounts to 120 mln barrels.
Let’s go further. Every refinery has its tank farm, where the crude is stored. Since the US is the world’s champion in the oil processing, the stocks at the refineries there amounts to around 100 mln barrels. Can we consume or sell them IN THE FULL AMOUNT? No, we can’t, because the refineries would stop. It is a continuous process. A good half of the refinery’s tanks are always kept full, and this oil is again process, but not commercial. Note that these stocks grew only slightly, by just 6-7% in the recent years.
The largest stocks are generated while producing and transporting oil. At the well pads there are vessels, where oil goes to after the most basic separation. There are always field oil storages in the oilfields. There are also transport terminals, where oil is loaded from the tankers into the tanks and then pumped into the pipelines. The total capacity of the storages is 535 mln barrels. Can we empty ALL the tanks? Theoretically we can, but practically we can’t. In the bottom of the tank there is some water, which accumulates by droplets and is disposed of from time to time, though some of it still lingers in the last portion of oil and would ruin its quality. Besides, while one tank is getting filled another is getting emptied, there is still some oil in both of them. And here a part of oil (at least 10%) is a process oil and is not for sale.
I’ll also mention Cushing terminal, Oklahoma. Since 1983 the futures contracts at NYMEX exchange provide for the delivery of oil to this large tank farm. Its total capacity is 90.4 mln barrels, but 15% of it is used to secure trading. The rest is given for rent. This is where traders keep the oil they purchase to make money on the increase of its price. So, all the oil which guarantees the delivery on the futures can’t be sold without interfering with the stock exchange trading.
2. FREQUENT FLUCTUATIONS AND LONG TRENDS
Now it’s time to pass over to the stocks. Their weekly changes are shown in Pic.1.
This is the typical picture of accidental periodic fluctuations. Since the target value is affected by a dozen of factors: ocean storms, refinery maintenance, hot and cold weather, and even fake news. The red dots are the consensus forecasts, made by two dozens of analysts. This is a kind of game, called “Guess the figure”. The forecast often hits the top or the bottom, but it doesn’t bother the analysts: their reputation is safe from harm and so is their salary.
Regularities are observed on the graph of stock changes in the last 35 years (pic.2). It can be seen that two long trends took place accompanied by regular seasonal fluctuations. In 1990-2005 the average amount of stocks reduced by 51 mln barrels, then it grew by 76 mln during the following 7 years.
This makes sense: the amount of oil in the process facilities is proportional to the production. When it decreased the last leftovers were pumped out of the vessels. Since 2008 the growth of production at the shale fields began, dozens of thousands of new wells appeared, as well as pipelines and tank farms, with new oil in them. It has to be understood: nobody is going to store extra oil for no reason, it costs money. The only exception is the state’s strategic stocks, since the state doesn’t bother to count money and then it doesn’t generate revenue, but spends it.
In the last three years the stocks growth facilitated. Let’s upscale it to a monthly chart and trace the balance between the supply of oil (that is the production plus net imports) and its processing (pic.3).
In the summer, when the demand for fuel in the country increases, the refineries are fully loaded and the stocks reduce. In the autumn and winter the stocks accumulate, so this is a good time for the routine maintenance of the oil processing equipment. The maximum stocks increase (109 mln barrels) happened during the first 4 months of 2015. At the time the production was still growing while the import remained at the same level (pic.4). The later had decreased slower before that.
Then the process changed direction, but here the import grew faster than the production decreased. Now the production equaled the level of 2013, and the import became 0.9 mln bopd more. The changes in the stocks for the last three years are shown in the table.
The total stocks increment amounted to 135 mln barrels. 39.4 mln bbl were added to Cushing terminal; this oil is waiting for the price increase to be sold. Almost 100 mln barrels were accumulated by companies. About half of the total stocks are available, the rest is used in technological processes. Having done some simple calculations one may see that three years ago only a third part of the stocks was available.
3. WHY IS IMPORT GROWING?
The producers and the processors liked the shale oil at once. It is so light. As the Americans say, “sweet oil”. Gasoline fractions split wonderfully, it separates from water quickly and is easy to pump. Some of the wells even produced gas and gas condensate, some switched to this mix after some time. But when the production of the light oil doubled, EIA got concerned about the problem and presented the forecast shown in pic. 5.
According to the forecast, the share of light oil of 780-825 kg/cub.m (over 40î API) was supposed to reach half of the produced crude by now. So it is, now it equals 4.5 mmbpod or 52.5% of the total US production. The states of Texas and North Dakota account for the most shale oil, the dynamics for the states are shown in pic. 6.
Bakken oilfield in North Dakota produces 92% of light oil. Curiously enough, in the summer the density of the produced oil grows by 2-4%. This happens because the lightest fractions evaporate from the vessels. It might seem a trifle, but almost 1 mln tons vanish into the air.
In Texas a third of the production comes from the conventional oilfields, Permian Basin is being actively drilled, and the biggest part of light oil comes from Eagle Field. Because it constitutes 65-70%. There are summer minimums there as well, but they are less distinct, because the winter there is relatively warm. The losses due to evaporation here are hardly smaller, it’s just they are not so easy to estimate.
Let’s add 1 mln bpd of gas condensate separated at the refineries to the oil. With this feedstock one can fill all the containers available with gasoline, but there will be a lack of diesel fuel and other dark oil derivates. Besides, the American refineries are designed to process heavy oil; the feed for cracking is the residual oil, which is also scarce. Finally, the straight-run gasoline, whose stocks are growing by 6-7% a year, requires a more complex modification; its surplus becomes a pain in the neck for the processors. Note that the stocks of the other light hydrocarbons have also grown in the last three years: propane by 80%, other liquefied gases by 32%. All the import increase (0.9 mln bpd) accounts for the supply of heavy oil from Canada.
Now let’s pass over to the conclusions.
4.1. The trend of the US commercial crude stocks increase got stronger for 2008-2014 during the development of the low-permeable (shale) deposits. Meanwhile two thirds of the remaining oil were used in the processes of treatment, processing, transportation and trading.
4.2. Reaching the maximum production and the price drop in the beginning of 2015 added over 100 mln barrels of crude stocks to the storages. However, at the moment the stocks are rising due the import of heavy oil mainly from Canada.
4.3. The reason for the import increase is that the surplus of light oil caused a misbalance in the oil processing. It will take 1-2 years to arrange a regular export of light oil and derivates, but until it happens the oil stocks in the US will continue growing. This growth is not just the consequence of the surplus of feedstock, but also of the unsatisfactory nomenclature of deliverables.
4.4. Weekly fluctuations of the commercial stocks reflect only accidental and seasonal factors. Any attempts of the stock analysts to use them as the means of oil prices forecasting are a waste of time.
4.5. The general trend is to increase the commercial stocks in line with the increase of the global oil production. Meanwhile 50-67% of the stocks are employed in the processes of treatment, processing, transportation and trading. After the decrease in the price the share of speculatively purchased oil grew considerably; it will reduce gradually with the rise of oil prices. And it’s not too far away.