Looking at the data, it is clear to me that oil inventories have nowhere to hide now. As many participants in the oil market were confused throughout April about the lack of visible oil inventory draws, the data so far in May all confirm that the deficit is real and the draws are here.
In the past 2 weeks, observable oil inventories (satellite, oil-on-water, and EIA) declined by ~121 million bbls. Goldman published a note today also verifying the increase in visible oil inventory draws with an average of 8.7 million b/d for May.
The math is what it is. Even if the Strait of Hormuz had reopened back in mid-April, these visible oil inventory draws were inevitable.
The Math
First, we need to understand the sequencing.
Production shut-in results in lower crude exports.
Lower crude exports result in lower crude imports.
The initial loss in crude exports push oil-on-water lower. But as other segments of the market boost exports (the US), oil-on-water moves higher.
But given there’s no production restart because the Strait of Hormuz is still closed, oil-on-water is now falling again, which will push onshore oil inventories lower.
This is precisely what we are seeing in oil-on-water. Higher US crude exports will be insufficient to fill the gap.
Why?
Global crude exports are lower by ~6 million b/d in May vs last year. That’s with the US averaging 5.6 million b/d this month, or +2.1 million b/d y-o-y.
What most people may not realize is that the current export trend in the US is completely unsustainable. This week’s EIA oil storage report saw the largest crude oil inventory draw in history, and slightly lower than what we had projected. By July, US commercial crude storage will hit an operational minimum, and the market is already starting to price out US crude exports.
We estimate that the US can average ~4.6 million b/d without excessively draining crude oil inventories, which means the rest of the world will see another ~1 million b/d reduction in flow.
By July, the y-o-y global crude flow deficit will hit ~8 million b/d.