uploads///Crude inventories

Why Did a 0.9% Fall in Crude Oil Inventories Impact MLPs?

By

Updated

US crude oil inventories

According to data released on April 7, 2016, US crude oil (USO) inventories fell 0.9% in the week ending April 1, 2016. This is the first week-over-week decline in US crude inventories in 2016. The decline was driven by a slight fall in crude oil production, low crude oil imports, and higher refinery utilization compared to the previous week.

The US refinery utilization rate rose to 91.4% from 90.4% in the previous week. The refinery utilization rate is the gross input divided by refineries’ operable refining capacities. US crude oil inventories have risen significantly since mid-2014.

Article continues below advertisement

US crude oil production

US crude oil production fell 0.2% in the week ending April 1. The above graph shows the weekly supply and demand for crude oil in the US over the six-week period ending April 1. A fall in crude oil production negatively impacts crude-oil-heavy midstream MLPs including Plains All American Pipeline (PAA), Genesis Energy (GEL), and Sunoco Logistics Partners (SXL).

US crude oil imports

US crude oil imports fell 6.4% in the week ending April 1 resulting in the second consecutive week-over-week decline. Imports fell 7.6% in the week ending March 25. With increased domestic production, imports fell over time to keep the US crude oil supply relatively stable.

Article continues below advertisement

US refinery inputs

For the week ending April 1, US crude oil refinery inputs were 16.4 MMbpd (million barrels per day). The inputs to US refineries were more than the total crude oil production, and imports driving the crude oil stocks were lower for the week. Crude oil supply and demand dynamics drive crude oil prices.

US crude oil exports

According to a study by the EIA (U.S. Energy Information Administration), if the projected crude oil production remains below 10.6 MMbpd over the next decade, lifting a ban on US crude oil exports may not make a major difference in crude oil prices.

However, the study shows that if domestic production in 2025 ranges between 11.7 MMbpd and 13.6 MMbpd, lifting the ban might result in increased domestic production, higher crude oil exports, reduced product exports, and slightly lower gasoline prices in the US.

Lifting the ban on US crude oil exports could narrow the spread between WTI (West Texas Intermediate) and Brent crude oil prices. We’ll analyze this spread in the next part of this series. Narrowing of the WTI-Brent spread could benefit upstream MLPs such as Memorial Production Partners (MEMP), Breitburn Energy Partners (BBEP), and Vanguard Natural Resources (VNR). At the same time, the EIA expects refining companies’ margins to be lower as the WTI-Brent spread narrows.

Advertisement

More From Market Realist