Crude oil inventories
According to data released on August 19, US crude oil inventories rose 0.6% in the week ending August 14 compared to the previous week. At the same time, the refinery utilization rate declined to 95.1% for the week ending August 14 from 96.10% in the previous week. The refinery utilization rate is calculated as gross inputs to refineries divided by refineries’ operable refining capacity. A decline in refinery utilization may contribute to a rise in inventory levels.
Crude oil imports
The above graph shows the weekly demand and supply for crude oil in the United States. Crude oil production in the week ended August 14 fell 0.5% compared to the previous week. Crude oil imports, on the other hand, rose 6.1% compared to the previous week. Imports had risen 5.5% in the week ended August 7.
In its August “Short-Term Energy Outlook,” the EIA (U.S. Energy Information Administration) forecasts that US crude oil production will average 9.4 million b/d (barrels/day) in 2015 and 9.0 million b/d in 2016. This is lower than the EIA’s July outlook. The decrease in forecast reflects a lower crude oil price outlook. This lower price outlook is expected to affect oil-directed rig counts, drilling, and well completion projects in 2015 and 2016.
As the above graph shows, crude oil refinery inputs for the latest week were 16.8MMbpd (million barrels per day). The inputs to the refineries were less than the total crude oil production and imports. This may contribute to a crude oil inventory build-up. Crude oil supply and demand dynamics drive crude oil prices.
Impact on MLPs
The demand for crude oil and refined products drives volumes and revenue for pipeline MLPs like Genesis Energy (GEL), Holly Energy Partners (HEP), NuStar Energy (NS), Tesoro Logistics (TLLP), and Phillips 66 Partners (PSXP).
Crude oil inventory levels in the United States are currently near 80-year highs. The high inventory levels have increased the demand for crude oil storage assets. MLPs with crude oil storage capacity are set to benefit from this increased demand for storage. MLPs with storage assets include Plains All American Pipeline (PAA), Magellan Midstream Partners (MMP), and Blueknight Energy Partners (BKEP).
Also, MLPs with crude oil and refined products storage capacity tend to benefit from “contango” markets. In a contango market, the futures prices are progressively higher for contracts dated farther in the future. In this case, MLPs like PAA—which have storage facilities—can purchase the commodity at the current price, store it, and simultaneously sell it in the forward market at higher prices. PAA forms ~2.9% of the First Trust North American Energy Infrastructure Fund (EMLP).