Why Did a 1.3% Rise in Crude Oil Inventories Impact MLPs?

US crude oil inventories

According to data released on April 14, 2016, US crude oil inventories rose 1.3% in the week ending April 8, 2016—driven by higher crude oil imports and lower refinery utilization.

The US refinery utilization rate fell to 89.2% from 91.4% in the previous week. The refinery utilization rate is the gross input divided by refineries’ operable refining capacities. US crude oil inventories rose significantly since mid-2014.
Why Did a 1.3% Rise in Crude Oil Inventories Impact MLPs?

US crude oil production

US crude oil production fell 0.3% in the week ending April 8. The above graph shows the weekly supply and demand for crude oil in the US over the six-week period ending April 8. A crude oil production decline negatively impacts crude oil heavy midstream MLPs including Plains All Pipeline America (PAA), Genesis Energy (GEL), and Sunoco Logistics Partners (SXL).

US crude oil imports

US crude oil imports rose 9.5% in the week ending April 8. It snapped declines for two consecutive weeks. Imports fell 6.4% in the week ending April 1. With increased domestic production, imports fell over time to keep the US crude oil supply relatively stable.

US refinery inputs

For the week ending April 8, US crude oil refinery inputs were 15.9 MMbpd (million barrels per day). The inputs to US refineries were less than the total crude oil production and imports driving the crude oil stocks higher 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 (USO) 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 (BEEP), and Legacy Reserves (LGCY). At the same time, the EIA expects refining companies’ margins to be lower as the WTI-Brent spread narrows.