Oil prices sold off after the Energy Information Administration (EIA) reported that crude supply rose yet again, but rallied on signs that output may be falling.
The EIA reported that U.S. crude output fell to 9.1 million barrels a day against a backdrop of increasing demand for gasoline and distillates. While distillate demand is 16% below a year ago, gas demand is 5.2% higher. In January, according to the API total petroleum deliveries for January (a measure of demand in the U.S.) rose 0.8% to 19.4 million barrels a day, the highest January levels since 2008. Oil gasoline deliveries also recorded their best January since 2007.
Oil really seemed to bounce back after a report that U.S. crude by rail deliveries tanked. Dow Jones reported that the Association of American Railroads said that crude-by-rail shipments dipped nearly 17% in 2015 and a whopping 35.2% in the fourth quarter. As soon as this report was released, oil rallied, shaking off supply.
U.S. refiners produced a record amount of gasoline according to the American Petroleum Institute, but that may be coming to an end. Even as gas demand hits its highest level in January since 2007, API refiners are saying enough is enough. The Wall Street Journal reports, “refineries in the U.S. Midwest are losing their thirst for oil, posing a new risk for the battered crude market."
The Midwest accounts for nearly a quarter of the crude processed in the United States and is home to shale producers that have few other outlets for their oil, but refiners there are already swimming in gasoline and other fuel. This is forcing them to cut back production until the excess can be worked off. The result has been more crude oil available in the market, worsening a glut that has been undermining oil prices for the past year and a half. With U.S. crude inventories at the highest level in more than 80 years, some storage hubs have little room left to store oil.
Yet in the past when refiners cut back, the cost of products increased and seemed to drive oil higher. Maybe with a glut of oil, this time will be different, but it would be unusual, especially as we start to have refiners switch to summer time blends of gasoline.
The reason the refiners are cutting back is falling margins. The Wall Street Journal reports that “refiners profit on the difference between oil prices and fuel prices. Oil prices have dropped 70% since mid-2014 to around $32 a barrel currently, but robust demand for gasoline kept prices at the pump from falling as quickly last year, boosting refiner margins.”
The EIA did report that gasoline stocks showed a surprise decline of 2.2 million barrels as gas production increased indicating stronger demand. This should be supportive of RBOB futures as we move forward.
The New York Times reports that oil companies are bleeding cash like crazy. One company is losing $5 a barrel on every barrel it pumps. They say the loss of small producers will take away 400,000 barrels of production, not to mention the job losses and bankruptcies. One small oil company owner asks how much bleeding he can take before he says enough is enough. The same question could be asked for large companies as well as OPEC and non-OPEC nations.
The answer is not much more.