North American Crude Inventories to Stay Historically High in 2016, but Draws are on the Way

North American crude inventories will stay at historically high levels this year, though Genscape expects the first material draws to take place in May 2016, as strong demand takes hold for the summer. With production declines slowly materializing in the face of stronger pricing, coupled with significant outages at oil sands facilities reducing imports from Canada in the spring, stocks are expected to peak in April 2016, drawing down through the summer. Genscape’s balance forecast for 2016 through 2018 calls for:

• Material production declines in most of the major U.S. basins: Genscape expects North American production to fall by -581 Mb/d in 2016, and -317 Mb/d in 2017, as surging blended Canadian production is expected to grow at +84 Mb/d year-over-year in 2016. The biggest U.S. declines will occur in the Eagleford and Bakken, with resiliency in the Permian. Heavy upgrader turnarounds in Spring 2016 will impact near-term U.S. imports from Canada.
• Strong crude runs: Runs are stronger than previously expected. Margins have stabilized due to the transition to summer gasoline blends, after a dreadful first quarter marred by economic run cuts. RBOB prices have increased 40 percent since late February 2016. Utilization rates will exceed 88 percent for 2016 for North America, with crude oil demand peaking in 2016 at 19.1 MMb/d in late summer. April and May 2016 are pivotal months for planned work, possibly bringing utilization rates down two to four percent from March 2016, before expected high throughputs this summer.
• World imports into the U.S. will grow in 2016: With domestic production declining, Genscape’s view is that world imports buck the trend from previous year-over-year declines. We have total world imports into the U.S. at +518 Mb/d year-over-year for 2016, with light imports at +77 Mb/d year-over-year, intermediate imports at +693 Mb/d year-over-year, heavy imports at -246 Mb/d year-over-year. This is definitely an area of downside risk, where imports could under-whelm after a strong start to 2016 and pull even more barrels out of domestic storage.
• Insignificant growth in world exports: With the Brent-WTI forward spread in the $+-1.00 range, there is no support for material growth in exports from North America. Nonetheless, there could be some upside risk here if this spread was to widen significantly in the coming months.
• Inventories decreasing through 2016, with pressure towards continuing builds as runs slow: Genscape expects the biggest draw in P3 with inventories at 271.2 MM bbls in Q2 and coming down by 5.3 MM bbls to 265.9 MM bbls in Q3. In P5, from Q2 levels, Genscape expects draws of 3.4 MM bbls, pulling stocks down to 54.3 MM bbls in Q3. For P2, inventories will average 160.7 MM bbls in Q2 and draw by 8.6 MM bbls to 152.1 MM bbls in Q3 before demand starts to slow through the fall.

Genscape's new North American Crude Oil Balance Forecast provides a fundamental view of the market to help inform price forecasts. See where North American inventories are going and request a free trial of the North American Crude Oil Balance Forecast now.