Now you see it, now you don’t. Oil supplies fell for the first time in 10 weeks but is it everything that its seems? U.S. oil reserves seemingly disappeared but is the oil actually gone? And OPEC releases their outlook that shows non-OPEC production falling but will it ever come back? These are the questions weighing on oil. Will the oil glut disappear?
Oil prices rallied after the Energy Information Administration (EIA) reported U.S. commercial crude oil inventories fell by a larger than forecast 3.6 million barrels from the previous week. But was the drop due to a fundamental change or year-end tax considerations? Oil companies and refiners are taxed based on the amount of oil in storage at the end of the year. It is likely that oil companies and refiners maneuvered to lower their inventories for year-end tax charges. That is one reason the rally in oil had a hard time holding on because the market is speculating that the oil supply may magically reappear next month.
The other reason the rally was short lived was because the API reported a huge 5.0 million barrel increase in distillate supply where demand has been hampered by much warmer weather than expected in December. That might have been enough to crush oil except for a bullish number for gasoline.
The EIA reported total motor gasoline inventories increased by 0.8 million barrels last week reflecting strong demand even though supplies are in the upper half of the average range. Over the last four weeks, motor gasoline product supplies averaged about 9.2 million barrels per day, up by 0.7% from the same period last year.
U.S. oil reserves are falling!! Bloomberg News reports, “In an instant, Chesapeake Energy (N:CHK) Corp. (N:CHK_pd) will erase the equivalent of 1.1 billion barrels of oil from its books. Across the American shale patch, companies are being forced to square their reported oil reserves with hard economic reality. After lobbying for rules that let them claim their vast underground potential at the start of the boom, they must now acknowledge what their investors already know: many prospective wells would lose money with oil hovering below $40 a barrel.
Companies such as Chesapeake, founded by fracking pioneer Aubrey McClendon, pushed the Securities and Exchange Commission for an accounting change in 2009 that made it easier to claim reserves from wells that wouldn’t be drilled for years. Inventories almost doubled and investors poured money into the shale boom, enticed by near-bottomless prospects. But the rule has a catch. It requires that the undrilled wells be profitable at a price determined by an SEC formula and they must be drilled within five years. Time is up, prices are down, and the rule is about to wipe out billions of barrels of shale drillers’ reserves. The reckoning is coming in the next few months, when the companies report 2015 figures.”
OPEC figures released overnight are not raising expectations that the oil glut is going away anytime soon. OPEC says that non-OPEC production will fall by only 250,000 barrels. Not exactly the type of number that makes you think U.S. producers are going to really quit. They also have a weaker demand forecast showing demand growth at 1.25 million barrels a day down from 1.53 million barrels per day and production increased to 31.695 million barrels a day.
The Strategic Petroleum Reserve has its marching orders to sell some crude. The EIA reports that there are two recently enacted laws authorizing significant sales of crude oil from the Strategic Petroleum Reserve (SPR) over the next decade. The Bipartisan Budget Act authorizes the sale of 58 million barrels of SPR oil between FY 2018-25 for deficit reduction purposes and an estimated 40-50 million barrels of oil in FY 2017-20 for SPR modernization. As part of the Bipartisan Budget Act, the U.S. Department of Energy (DOE) is required to complete a long-term strategic review of the SPR to ensure it meets current and future energy and economic security goals and objectives. The Fixing America's Surface Transportation Act authorizes the sale of 66 million barrels of oil in FY 2023-25 to help support the Highway Trust Fund.
We say we are in the bust end of the cycle and see a rebound in January as the pattern is following last years pattern.