Raymond James Energy Stat of the Week
by J. Marshall Adkins

Energy Stat: Why is the Market Underestimating the "Right" Amount of U.S. Crude Storage?
June 26, 2017

Unfortunately, today's U.S. crude inventory landscape remains both one of the most high profile topics, as well as one of the most misunderstood topics within the realm of the crude markets. With U.S. production nearly doubling over the past six years, the amount of pipelines and storage tanks needed to facilitate the movement of that oil to the end markets has also skyrocketed (since this pipeline fill and associated tank storage at the end of the pipe is included in oil inventories). Given the fact that today, U.S. crude inventories are driven more so by ''days of production'' than ''days of demand,''it only makes sense that U.S. inventories are posting record highs (and should continue to do so longer-term).

While most market participants would paint a very bleak picture at the moment - likely suggesting that U.S. inventories are at least more than 120 million bbls higher than historical averages (~510 million bbls vs. the 5 and 10-year averages of ~350 million bbls and ~390 million bbls, respectively), we would counter with the notion that the true ''excess'' inventory figure is actually much more modest (closer to ~40-45 million bbls). Reaching this level of inventory in the near future is much more easily achievable than working down ~120-160 million bbls of excess inventories. Based on our oil model, we see U.S commercial inventories falling below the ''right normal'' level of ~465-470 million barrels in the next 3-6 months. We anticipate this should mark a strong inflection point for the crude market and drive oil prices and energy stocks higher.


This is a summary of a much more detailed commentary. Please contact your financial advisor for the full report.

There is no assurance any of the trends mentioned will continue in the future. Past performance is not indicative of future results. Investing involves risk and investors may incur a profit or a loss. Specific sector investing can be subject to different and greater risks than more diversified investments. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Commodities are volatile investments and should only form a small part of a diversified portfolio. Markets for commodities are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The S&P 500 is an unmanaged index of 500 widely held stocks. The Oil Services Index (OSX) comprises 15 of the largest oil service companies. The S&P SuperComposite Oil and Gas Exploration & Production Index (S&P Oil and Gas E&P) consists of all oil and gas exploration and production stocks included in the S&P SuperComposite 1500 Index. Investors cannot invest directly in an index. Additional information is available upon request.