Global Oil Inventories Are Starting 2023 With Builds But For How Long?

EIA published the first weekly oil report of 2023 today and it was a massive build in crude. Due to the refinery outage from the freeze-off, US commercial crude saw a build of 19 million bbls. Our initial forecast had predicted a small build, but the variables that were significantly off were on the 1) production and 2) refinery throughput side. With refinery throughput still lackluster at ~14.651 million b/d, next week's report will also show another crude build. Our preliminary estimate indicates something around ~8 million bbls.

How realistic is this crude build? Not very realistic, and here's why.

Using our trued-up adjustment model, you can see in the chart below the massive dip in the green dotted line followed by the spike.

To give you an idea of how volatile the last two week's reports are, the modified adjustment fell to just 31k b/d in the previous report before jumping to 1.71 million b/d this week. 

To put it in layman's terms, what this figure is saying to us is that the implied US oil production including condensate figure is ~13.91 million b/d. How realistic is that? Not realistic at all.

In essence, what should have been a smoothed build of around ~10 million bbls a week turned into this monstrosity. Thankfully, the market is smart enough to overlook this data.

What does this mean going forward?

Prior to the freeze-off, refinery throughput was 16.149 million b/d. US oil production was impacted for a week by ~700k b/d (using our estimate). The difference in refinery throughput from the last 2 weeks total is ~26 million bbls. If we adjust for the production outage, the net difference is ~20 million bbls. 

What this implies is that the crude build has been the sole responsibility of the refinery outage. 

But what about products? Gasoline saw a build of 4.1 million bbls this week. While this is true on the surface, remember that refinery seasonality and year-end tax issues further exacerbate this problem. Product storages normally build into year-end and at the start of the year.

Now if you look at the product storage chart, you will notice that we are starting the year at one of the lowest starting points. This is bullish and if you remember in our crude storage outlook published on Monday, we said:

For the oil market, crude stock building is already what's being anticipated. The key will be to see how product inventories respond to start the year. Normally, we see product builds materially to start the year, so if this doesn't happen this year, you will see an oil rally in response to that.

And this is really the reason why the oil market is rallying. In addition, looking at future US crude exports, we are expected to see a jump back to ~3.8 to ~4 million b/d by the following week, which means if refinery throughput returns, then crude will show a draw again. Couple this with a low starting point in product storage, traders are starting to get the sense that the builds may be transitory.

Q1 and that's about it...

There's going to be some persistent softness in oil market balances in Q1. You see it in the physical timespreads, and overall inventories will show builds. But we think the market will start to look through this by February when April physical oil trading cycle starts. Given the recent increase in crude imports issued to teapot refineries in China, we think the first sign of strength will show up in West African Crude spreads followed by the potential return of backwardation in the Brent curve.

For the US, the key for readers will be to watch product inventories. Readers should expect product inventories to build, but if we match the pace we saw in 2022, then you will see refinery margins respond (going up), which will signal to you that this is the first key driver of higher oil prices.

In essence, we see inventories building in the near term and likely throughout Q1, but the pace of the build will be important. We think this is going to be a transitory event, and early February will be a telltale sign of just how strong the physical oil market will be by Q2.