EIA reported a bullish oil storage report today that saw draws across the board. Nonetheless, the broader market sell-off is pushing oil prices down, while the physical market signals are staying bullish.
Looking at this EIA oil storage report, one thing worthy of mention right off the bat is the rebound in demand.
If you look at the 3 charts above, the first one is total implied demand, the second one is demand for gasoline/distillate/jet fuel, and the third one includes a breakdown of all the demand components.
All of the demand signals (with the exception of the heating demand component) are starting to turn higher. This is a good signal, as it is starting to validate our assumption that consumer habits are now finally adapting to higher prices. While the rebound is encouraging, this is far from strong. We will need to keep seeing improvements in order to buy into the thesis that demand is indeed recovering. Higher oil prices will destroy some demand, so caution is still needed on this data point.
Looking at the other figures, it is starting to become apparent that we don’t have enough refining capacity in the U.S. for 1) how much we consume and 2) how much we export.
Gasoline storage is the most apparent one. What’s really scary about this figure is that we are not even in peak driving season yet. The US is already releasing ~7 million bbls of SPR per week, but since most of that gets exported out, crude storage is also dwindling. What happens to product storage when hurricane season comes and storage is already very low? That’s a frightening situation to think about.
It is plain irresponsible to use SPR to fight high prices as opposed to fighting emergencies. We will not be ready if a hurricane knocks out 1 to 1.5 million b/d of refining capacity. We are already at an absolute low level, so this will only get worse.
Finally, the SPR move is just a disguise for the severity of the deficit we are witnessing in the market today. You can see that we have been trending down nonstop since October 2021.
In fact, you can just look at this yearly comparison of crude storage with SPR change YTD. We are now down 43.779 million bbls YTD, or nearly 3x the draw size of 2021. And 2021 was a very negative year for oil inventories.
If oil demand holds up and continues to improve, oil inventories will keep moving lower. By the peak demand season this summer, product inventories will be very low resulting in any refinery outage cascading across the petroleum products market.
The result is that oil prices will likely keep grinding higher.