U.S. crude-oil inventories have climbed to their highest weekly level on record at the Energy Information Administration, and not just because of rising domestic production.
A number of factors, including strong oil imports, higher exploration and production company spending, and a slowdown in demand have combined to lift total commercial crude stockpiles to 518.1 million barrels for the week ended Feb. 10, according to EIA data dating back to August 1982.
That figure tops the former record of 512.095 million barrels for the week ended April 29, 2016.
“The continued growth in the stocks of crude is due to higher production in U.S. shale plays and imports that exceed the volume needed by refiners,” said James Williams, energy economist at WTRG Economics.
“We have enough petroleum inventory to cover close to 70 days of consumption, when the historical norm is well below 60 [days],” he said. The Organization of the Petroleum Exporting Countries is “trying to reduce it, but the effect of [its] efforts are not showing up in the U.S.”
MarketWatch asked several analysts how stockpiles managed to reach an all-time high, even as domestic crude production currently stands at 8.977 million barrels a day—below the record peak output of 9.61 million last seen during the week ended June 5, 2015.
Here are the reasons they came up with (in unranked order):
• Strong imports: “The real driving force has been the surge in imports,” said Troy Vincent, oil analyst at ClipperData.
‘The real driving force has been the surge in imports.’
The EIA on Wednesday report that crude imports for last week averaged 8.5 million barrels, down 881,000 barrels a day from a week earlier. However, over the last four weeks, they have climbed 9.9% vs. the same period a year earlier.
Matt Smith, director of commodity research at ClipperData, said that the U.S. saw nearly 10% more waterborne imports in 2016 than the year before.
“Bargain-basement prices for foreign oil in the last year have been too difficult for U.S. refiners to ignore,” he said. “We will likely see this trend ebb in the months ahead, as OPEC imports fall off—yet U.S. production is rising again to plug the gap.”
• OPEC: “Keep in mind the OPEC cut isn’t really fully felt inside the USA just yet,” said Nico Pantelis, head of research at Secular Investor.
OPEC members agreed in late November to cut their production levels at the start of the new year by 1.2 million barrels in a bid to alleviate a glut of global supplies and prop up prices which had dropped by about half from their 2013 levels. Data, including some included in OPEC’s monthly oil report issued Monday, have shown a compliance rate of 90% with the reductions.
But the “transit time between the countries where the USA is importing a large part of its oil from is several weeks, so cargoes arriving from the Middle East are still geared towards a full production rate in Saudi Arabia,” said Pantelis, noting that 11% of U.S. imported oil comes from Saudi Arabia.
The market will see lower import numbers materializing in the next few weeks, he added.
• Reduced refinery runs: U.S. crude-oil refinery inputs averaged about 15.5 million barrels a day last week—that’s 435,000 barrels per day less than the previous week and down about 390,000 barrels from the year-ago level, according to the EIA.
Refinery utilization stood at 85.4% of capacity, down from 87.7% a week earlier and 88.3% a year earlier, data showed.
That means there’s less crude headed to, and being processed at, the refineries.
• U.S. production: Charles Perry, chief executive officer of energy-consulting firm Perry Management, summed this up well: “the rise in [crude] inventories is due to increase in domestic drilling driven by good economics for domestic production.”
Weekly U.S. crude-oil production at just under 9 million barrels a day has a ways to go before reaching any records, but domestic output has generally been climbing since the second half of 2016 as oil prices for West Texas Intermediate CLH7, -0.19% and Brent crude LCOJ7, -0.13% climbed to levels they hadn’t seen in more than a year.
The EIA has estimated that more than half of U.S. production comes from shale oil.
A monthly report from the government agency released Monday showed expectations for a month-on-month increase of 80,000 barrels a day in March shale oil production.
And oil-rig count data from Baker Hughes BHI, +0.00% point to even more output gains ahead.
Active U.S. rigs drilling for oil have climbed over each of the last four weeks to their highest level in roughly four months.
• Rise in oil company spending: “Several North American oil producers have increased their [capital expenditure] budgets in the final quarter of last year, and this resulted in a corresponding production increase, which is boosting the inventory levels,” said Pantelis.
Exxon Mobil Corp. XOM, +0.41% announced in late January that it plans to spend $22 billion this year, 14% higher than the amount it spent in 2016.
• Demand slowdown: S&P Global Platts estimated Chinese oil demand growth of 1.3% in 2016 to 11.35 million barrels a day, but that was down from 6.6% growth in 2015, when price declines boosted demand.
Reuters calculated Chinese oil demand growth of 2.5% in 2016, based on official data—a three-year low—down from 3.1% in 2015.
“Two years of OPEC overproduction to defend market share and the introduction of 4.5 million barrels [from 2007-08 levels] of incremental U.S. [lower 48 states] production that transpired concurrently with a slowdown in the rate of China oil demand as well as OECD oil demand, brought us to current record inventory levels,” said Chris Kettenmann, chief energy strategist at Macro Risk Advisors.