EIA Oil Inventory Report – Just A Game of Musical Chairs?
Jul 12, 2017 Trading Blog
We had a great headline number for this morning’s EIA report, but as I type, the XOP and USO are making their way back to the lows of the day. After digging into the headline number a little deeper, maybe the decline in XOP/USO shouldn’t come as such a surprise. It’s kind of long, but I’ll explain.
The EIA report is basically a simple equation of Petroleum In vs. Petroleum Out. On one side of the equation is Production and Imports, on the other side is Exports and Demand/Use. The difference in the sides is the amount inventory draws or builds. (I know there are some adjustments, but just trying to stick to the basic theory of the report).
So today’s number was an increase in production and a decrease in imports on one side of the equation, which was balanced against an increase in exports and a decrease in Demand/Use on the other side of the equation (Refinery Inputs/Products Supplied). The resulting draw was ~7.5 million.
When you really dig into these numbers in the equation, the biggest factors are Imports and Exports. Those two numbers are having the biggest effect on the overall results of the equation (draw or build). For the last several weeks Imports have decreased and Exports have increased heavily. The effect this is having on the equation, everything else being equal, is a large weekly draw.
So realistically, what has happened is that we have so much supply here in the US that we really don’t need Imports. And on the other hand we also have so much supply here in the US that we have plenty to export. So both of those things happen. The oil that would be in our inventory never gets sent to us by say Saudi. And other additional oil that would otherwise be in our tanks isn’t there because we sent it to such places as India or China.
But here is the real question: Is the EIA draw simply a matter of whose tanks the oil ends up in when the music stops each week? I mean, the actual amount of oil is all the same, it’s just that Saudi didn’t send it to us this week, and we sent ours to India this week. Which produces a nice fat draw. But what about the actual total amount of oil still in the overall system? Has it changed? No, it hasn’t. It’s just sitting in different tanks (Saudi, India and China) this week. At such point as that changes and Saudi sends us oil, or we don’t send oil to China, the oil will be in our tanks in future weeks when the music stops.
In addition to such a large portion of the draw being Import/Export differential, this week products supplied (real demand) took a dive, and the result was an even bigger draw. How does this even happen? Mainly because of the increasing exports and decreasing imports are having such a huge effect on the equation. Had Imports/Exports been equal, the large decrease in products supplied would have led to a smaller draw. And to take this even further, US production was larger this week, however the draw was still bigger than last week, even with the decreased demand. But that really wasn’t the point of this musical chairs article, but just an external way of looking at how large the total effect of the import/export differential has grown.