Why did crude imports drop so suddenly? You have to look where the biggest drop in supply was: It was in the Gulf Coast. Gulf Coast supplies that had been hovering around 182 million barrels-plus for the last three weeks or so suddenly plunged to 175.8 million barrels. Hmm, I wonder what happened in the Gulf Coast last week that might have slowed oil tankers? Was it in part that some crude was diverted to Europe due to a higher Brent price?
Was it because, as Reuters News theorizes, there was a steep premium for long-dated crude oil futures that some traders may have temporarily parked off the U.S. Gulf Coast in order to lock in a higher price down the road? Are traders just playing the contango, holding off deliveries in anticipation of prices rising later? Reuters says that stocks of crude stored offshore fell to 50 million to 60 million barrels in June and part of July, but several sources recently put them around 70 million barrels and rising.
Or is it perhaps because refiners are using sweeter blends of crude due to higher heavy grade prices? Perhaps, but then why are refinery runs still falling?
You see, my dear Watson, there is truth in all of these theories and they no doubt played a part in adding to this mystery -- but could the real answer be as elementary as the weather? There were two storms in the Atlantic, and just after the reporting period, tropical storm Claudette -- the third of the Atlantic hurricane season -- formed in the eastern Gulf of Mexico and moved ashore within hours. Is it possible that tankers looking at the weather wanted to wait out these storms in the ocean instead of trying to beat a path into the Gulf ahead of the storms? And could the massive move in oil be a short squeeze and therefore part of the reason the market reacted the way it did? In part, that it was an old-fashioned squeeze, if you please?
Let's face it, if oil was rallying because demand was surging or because supply was so tight, any aberration might be critical. But this drop in supply is not going to leave refineries anywhere wanting. I do not think there is any refiner sitting around waiting for the ships to come in. Next week, we will be waiting for oil's ship to come in! If I am right, they will be coming in, and the inventory-induced mystery will be solved.
Republished with permission from Alaron's Energy Report Daily.