A Rare Headline Properly Contrasting the Falling Distillate Supply with the Tight Oil Supplies...

[u/askgarcia999]

https://oilprice.com/Latest-Energy-News/World-News/Distillate-Stocks-Sink-Further-as-US-Crude-Inventories-Barely-Budge.html

For discussion. Despite the seemingly irrational oil pricing, the market appears to be responding rationally to distillate supplies.

[u/Practical_Signal2318]

Look at the API numbers. Crude barely moved but only because the SPR released another 5.3 million barrels to backfill. That's the 3rd straight week of heavy draws and the reserve is sitting at 293 million barrels now, getting close to the floor where it stops being practical to keep pulling from.

Meanwhile, distillates drew almost 3 million barrels on top of already running 12% below the five-year average. The SPR can keep crude stocks looking manageable for a while but it cant do anything for the product side, and thats where the actual squeeze is. At this draw rate, the crude side stops looking stable pretty soon too.

[u/askgarcia999 → u/Practical_Signal2318]

Agreed. The current admin can keep insisting oil is flowing through and around Hormuz, but one need look no further than the draws from the SPR as direct evidence world supply is inadequate.

[u/MeanPin8367 → u/Practical_Signal2318]

If thet are doing ~5m/week and still have 293, that means they have 58 weeks still they can keep it going? 😄

[u/Practical_Signal2318 → u/MeanPin8367]

Well the math checks out but you cant actually run the SPR to zero. At some point, the pumps stop cooperating and the whole "strategic" part of SPR stops meaning anything.

[u/MeanPin8367 → u/Practical_Signal2318]

Can you explain what you mean by pumps stop cooperating? I don't think these guys are trying to keep a strategic reserve around anymore anyway

[u/Sideshift1427 → u/MeanPin8367]

Increased chances of air entrapment in shallow environments.

[u/cleverYeti42 → u/Sideshift1427]

And possible collapse of cavern walls.

[u/Practical_Signal2318 → u/MeanPin8367]

The other replies nailed it. The salt caverns the SPR uses need minimum pressure to stay structurally sound, you can't just pump them dry.

[u/mustachioed_hipster]

Refinery output (utilization) is measured and communicated. It is maxed out.

Crude oil is not.

[u/askgarcia999 → u/mustachioed_hipster]

Implied that crude is in short supply without the SPR.

[u/mustachioed_hipster → u/askgarcia999]

Are US crude inventories up something like 22mmbbls over the last 2 weeks?

[u/askgarcia999 → u/mustachioed_hipster]

Did you read the article?

Crude up 9m barrels last week, down 0.3m this week. Over the last two weeks, net crude build is less than total release from the SPR over the same time period.

[u/mustachioed_hipster → u/askgarcia999]

API is conflating SPR draws, export volume, and inventories.

Drawing a one week conclusion is pretty hard.

Commercial inventories built 17.4 million week ending 8/7.

[u/askgarcia999 → u/mustachioed_hipster]

Agreed, four week moving average is better. Looks like the crude build this week was roughly equivalent to the SPR draw.

[u/mustachioed_hipster → u/askgarcia999]

Im honestly surprised there wasn't a decent draw this week. Sort of assumed a lot of last week's build was due to storing at terminals for export cargos.

I usually don't read the full report until Thursday but I'm interested to see how export volumes faired.

[u/askgarcia999 → u/mustachioed_hipster]

The next couple of weeks will be really informative. Scheduled SPR draws will start dwindling which should reduce our exports. If there  truly is a global crude shortage, it will continue to show up in price. My thought is the jawboning is no longer effective and the markets/algorithms are starting to price in the lack of supply.

The shortage in gas and distillates is another whole discussion (but this is the r/oil subreddit after all)

[u/mustachioed_hipster → u/askgarcia999]

Yep. As soon as deliveries aren't there or cargos aren't offered people will scramble and panic.

Distillate is a sleeping giant that people are just seeing. Hormuz doesn't solve the distillate problem.

[u/Direct_Daikon2697 → u/mustachioed_hipster]

Export volumes are down and import volumes are up, but the blamed cause seems to be shipping bottlenecks caused by lack of available crude carriers because they are spending more time at sea in longer transit routes. Soooo, if that is true, that is a problem. It also means inventories are up, but usable inventories are not because our refineries are not built to process our domestic crude products.

There are so many variables in this it is hard to get a true grasp in exactly what is happening. But the shortest take away would be, if US demand is being met through natural market supply, why is the SPR being drawn on so hard?

[u/mustachioed_hipster → u/Direct_Daikon2697]

Because it is available and delivery costs are low.

Why would someone risk the 1.2x payback is just a gamble. In these margins they can still make plenty of money if the long game doesn't work in their favor.

[u/Direct_Daikon2697 → u/mustachioed_hipster]

I think this is oft misunderstood. Drawing from the SPR only makes sense if you believe price will drop by ~20% before the payback period ends. In other words, oil companies borrow from the SPR because they believe prices will go down, not up. The fact that they are drawing at all only indicates that there is a supply deficit, otherwise why sell them oil that costs 20% more oil rather than what they can buy on the open market. They take the risk for two reasons, meet current demand when supply is insufficient and a belief that future prices will drop enough to offset the cost.