Total commercial crude inventories in the United States fell by 6.5 million barrels in the week ending December 15. The decline was larger than the expected 3 million-barrel draw – but keeps inventories in the middle of the average range for this time of year. West Texas and Brent benchmark crude prices are broadly stable after the Energy Information Administration’s release.
Actual Vs. Expected Storage Numbers
Crude: – 6,595,000 mmbbl vs. -3,150,000 mmbbl
Gasoline: 1,237,000 mmbbl vs. 2,300,000 mmbbl
Distillates 769,000 mmbbl vs. 250,000 mmbbl
Crude prices are slightly down from a week ago as the initial knee-jerk reaction around last Tuesday’s shutdown of a major North Sea pipeline has faded. The last few weeks have shown that supply and demand are nearing equilibrium – but as we enter the cooler months, demand for heating oil should start to compensate for a large portion of the seasonal decrease in demand for gasoline.
In Canada, the western provinces are still suffering the consequences of limited transportation access for heavy oil.
The Keystone pipeline came back online at reduced pressure November 28th, and although it is expected to return to full output in the near future, the impact on prices will be felt for a longer time. Based on current forward pricing, the market does not expect the Western Canadian Select price to converge to within $20 of the West Texas Intermediate until April at the earliest.
Of course, futures prices are rarely a good indicator of where realized prices will land – but this does show that the excess heavy oil that has been kept behind the pipe in Western Canada will not immediately dissipate. Rail remains the fastest option in the short term, but it will take time to increase car capacity enough to offset the loss in throughput.
Bottom Line: As the end of the year approaches, major oil benchmarks have started to discount higher levels of market disruption risk. The global supply and demand balance has gotten narrow enough that interruptions in sources like the North Sea or Keystone pipelines can greatly disrupt refinery access to feedstock. The margin for error is thinning.
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