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Crude Oil Inventories Decline at Record Rate

During the recent Tour de France bicycle race, fans saw that the steep descents were as challenging and interesting as the steep climbs. In oil markets, analysts have recently observed a steep decline in U.S. commercial crude oil inventories with close attention and interest.

Crude oil inventories, which had been above their five-year range all but one week since March 2012, fell by a record 27 million barrels over the past three weeks and are back within the five-year range (Figure 1). Despite the record draw over the past three weeks, average 2013 inventories through July 12 remain 6 percent above the same period last year and 11 percent above the five-year average. Robust total U.S. inventories have been largely the result of high inventories in the Midwest (PADD 2) which, despite recent declines, remains 22 percent above the 5-year average for the week ending July 12. Inventories declined for three reasons: (1) an increase in U.S. refinery runs; (2) a decrease in crude oil imports; and (3) an increase in backwardation (a reduction in price for future months) on the West Texas Intermediate (WTI) futures price curve that has encouraged reducing inventories rather than buying crude at current market prices.

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The significant inventory draw was caused primarily by an increase in already high refinery demand for crude oil, including additional demand resulting from the restart of a 250,000 barrels per day (bbl/d) crude distillation unit at BP's Whiting, Indiana, refinery. Total U.S. refinery utilization increased 2.6 percentage points between June 21 and July 12, reaching 92.8 percent. Much of this increase is attributable to PADD 2, where utilization went from 87.9 percent to 94.6 percent over the same time, an increase of 6.7 percentage points. PADD 3 (Gulf Coast) utilization also rose over this period; at 95.4 percent for the week ending July 12, it was 2.3 percentage points above its June 21 level. Crude runs on the Gulf Coast have been buoyed by strong distillate margins. The 533,000 bbl/d increase in U.S. refinery net crude oil inputs pushed refinery runs to their highest level since 2005.

On the supply side, lower crude oil imports have increased the draw on stocks to meet demand from increased refinery runs. Crude oil imports into the United States for the weeks ending June 28 through July 12 averaged 649,000 bbl/d less than the three-week period ending June 21. Imports into the Gulf Coast and East Coast averaged 671,000 bbl/d and 219,000 bbl/d less, respectively, compared to the previous three-week period. Declines were led by lower imports from Saudi Arabia and Venezuela, which each dropped by about 25 percent over the three-week period ending July 12 compared to the prior three-week period, accounting for a 630,000-bbl/d decline. While year-to-date through July 12 U.S. imports of Canadian crude oil were 5 percent above 2012 levels, flooding in Alberta along with processing facility outages, have limited imports from Canada since June. As of July 12, Canadian imports are down 10 percent (278,000 bbl/d) from their 2013 high in mid-April. Lower Canadian supplies have a significant impact on PADD 2 inventory levels, since most Canadian crude comes to the United States via pipeline into the Midwest.

Higher crude runs in the Midwest and easing crude oil transportation constraints that are allowing more domestic crude oil to reach U.S. Gulf Coast refineries have pushed the WTI futures curve into backwardation over the next several months. This backwardation, with prices for close-in delivery above those for delivery in future months, creates an incentive to sell crude from inventory. On June 20, when the contract for August delivery became the prompt futures contract, prices for the next two months fell, resulting in the first consistent period of WTI backwardation since November 2011. In addition, on July 10, the prompt contract (August) premium over the second month reached $0.90 per barrel, the highest level since 2008. Spreads between the front month and longer-dated contracts are even wider. As of July 10, the December 2013 contract was trading at $4.23 per barrel below August.

On the Gulf Coast, inventories have fallen 16.3 million barrels since June 21, and in the Midwest inventories are down 6.8 million barrels. At Cushing, Oklahoma, the delivery point for the Nymex WTI futures contract, stocks fell 2.7 million barrels the week of July 5 and another 882,000 barrels the following week. Trade press reports indicated that crude production that was being delivered to Cushing storage is now being delivered directly to the Gulf Coast, thus reducing supply at Cushing. In addition, a syncrude crude processing facility in Canada was reported to have been out of service, reducing regional supplies of light sweet crude oil. Although average 2013 Cushing inventories remain 25 percent above 2012 levels, stock levels have declined for much of 2013 and are now slightly below their 2012 level. Along with pipeline infrastructure changes that have allowed crude to bypass Cushing, rail is facilitating the movement of crude oil directly from the Bakken formation in North Dakota to refineries on both the East and West coasts.

In addition to pushing the WTI market into backwardation, these developments are helping to raise Midcontinent spot prices, narrowing the spreads between North Sea Brent and WTI and between Bakken and Light Louisiana Sweet (LLS) crude oils. However, the resumption of syncrude imports and an anticipated refinery switch by BP Whiting to heavier Canadian crude later this year could take upward pressure off prompt WTI prices, flattening the forward curve.

Gasoline prices up for a second week; diesel fuel up for a third
The U.S. average retail price of regular gasoline increased five cents to $3.68 per gallon as of July 22, 2013, up 19 cents from last year at this time. The largest increase came on the East Coast, where the price is up seven cents to $3.66 per gallon. The Gulf Coast price is $3.51 per gallon, six cents higher than last week. The West Coast price is $3.95 per gallon, three cents higher. The Midwest price is $3.66 per gallon, two cents higher. Rounding out the regions, the Rocky Mountain price increased a penny to $3.62 per gallon.

The national average diesel fuel price increased four cents to $3.90 per gallon, 12 cents higher than last year at this time. The East Coast, Gulf Coast, Rocky Mountain, and West Coast prices all increased four cents, to $3.92, $3.84, $3.87, and $4.04 per gallon, respectively. Rounding out the regions, the Midwest price is up two cents to $3.88 per gallon.

Propane inventories gain
Total U.S. inventories of propane increased 1.5 million barrels from last week to end at 59.4 million barrels, but are 6.6 million barrels (10.0 percent) lower than the same period a year ago. The Midwest region led the gain with 0.9 million barrels, while Gulf Coast stocks increased by 0.5 million barrels. Rocky Mountain/West Coast stocks increased by 0.4 million barrels, and East Coast stocks decreased by 0.4 million barrels. Propylene non-fuel-use inventories represented 5.4 percent of total propane inventories.

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