Thursday January 12, 2017
This week's volatile price changes continued yesterday, as the market shook off an "on paper" bearish Department of Energy (DOE) inventory report to recoup a healthy portion of the losses seen in the past few days. February WTI had dropped by three dollars in the first two sessions this week, closing at its lowest level since mid-December and giving the "defenders of $50" bulls reason for pause.
The DOE data was not price supportive (see below), but other than a brief move down after the data came out, prices were strong most of the day. The likely cause of the price run-up was discussion about the Paul Ryan-proposed "Border Adjustment Tax," that would impose a duty on all domestically imported goods (including oil). This tax would surely cause the price of oil to rise (the United States still imports eight million barrels of oil per day), and it would also bring finished product prices with it. One bank has even suggested a 30-cent increase in the price of gasoline and heating oil with this measure. Duties collected from this Border Tax would help offset some of the lost revenue from lower corporate income taxes (as proposed by the new administration).
The results of this week's DOE report were as follows:
• Crude Oil - build of 4.1 MMbbls (versus expected build of 1.2 MMbbls)
• Gasoline - build of 5.0 MMbbls (versus expected build of 1.6 MMbbls)
• Distillate - build of 8.4 MMbbls (versus expected build of 0.9 MMbbls)
As expected, imports surged in the most recent reporting period, with cargoes that had been delayed for delivery at year-end (tax limitations) being officially imported last week. Refinery inputs increased week-on-week, which added to the glut of finished products. Distillate stocks are up nearly 20-million barrels in two weeks, and are at their highest level in over five years. They are especially high in PADD III, the Gulf Coast region.
The market not only didn't react negatively to the data, but in fact moved higher not long after it came out. At one point, February WTI was up nearly two dollars (with RBOB and Heating Oil up six cents) before a slight fade towards the close limited some of the day's gains. The day's ultimate increases (WTI up $1.43, products up over four cents) were about half of the cumulative losses from Monday and Tuesday. Clearly there was something else at work for the market to move so strongly higher on Wednesday, and the chatter about this "Border Tax" could be the reason. Keep on eye on it going forward.
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