This week's petroleum supply data from the U.S. Energy Information Administration, which include robust builds in gasoline and distillate inventories and a slight decrease in crude oil inventories, mark a subsequent break from ten consecutive weeks of crude builds and 15 weeks of gasoline draws. Barring any unforeseen disruption in crude and product markets, this trend reversal, if confirmed in the next few weeks, may signal the start of a long-expected rebuilding of U.S. product inventories, as well as continued downward pressure on retail product prices this summer.
Directionally, the U.S. product markets tend to follow a seasonal pattern. U.S. refiners typically plan most of their maintenance activities during the first and fourth quarters. In the first quarter, maintenance is usually heaviest in February and early March. Reduced refinery inputs during that time lead to rising crude stocks but dwindling product inventories through the first quarter and into the second quarter. Seasonal swings in demand compound the effect of those shifts in the production cycle. Distillate inventories usually hit their trough in mid-April, following the heating season, while those of gasoline usually bottom out in May as winter-grade inventories are shed in favor of lower-volatility summer grades. May also typically marks an inflection point when refinery production returns in earnest. May is also when gasoline crack spreads typically reach their annual peak.
This year's trend in crude oil and product inventories had been broadly consistent with seasonal patterns, but both the crude build and product draws were steeper and more prolonged than could be fully attributed to planned maintenance: crude stocks posted builds of 22.3 million barrels (12.8 million barrels more than the five-year average) between early April and late May (Figure 1), even as gasoline stocks drew by 21.7 million barrels (10.3 million barrels more than the five-year average) and distillate stocks by 18.1 million barrels (18.1 million barrels more than the five-year average).
Increasing domestic crude oil production and below-average refinery runs caused crude inventories to grow strongly this spring. Through the first quarter of 2012, refineries ran at levels comparable to, and at times above, their five-year average. But a string of unplanned outages on the West Coast (most notably at BP's Cherry Point refinery in Washington state) kept U.S. gross refinery inputs flat through April, a time when refineries normally ramp up production ahead of summer. Strong crude production, which in the four weeks leading up to June 1 averaged 13 percent higher than a year ago in the lower 48 states, coupled with flat refinery inputs in April, set off the current run-up in crude oil inventories, which reached 384.7 million barrels on May 25, their highest level since July 1990. Much of the stock overhang found its way to the Cushing, Oklahoma storage and trading hub. The increase in Cushing inventories accounted for almost 30 percent (6.6 million barrels) of the total U.S. crude oil inventory build in April and May, a testament to the growing midcontinent production. The Gulf Coast accounted for another 44 percent (9.8 million barrels), aided by growing production from the Eagle Ford tight oil formation and the Permian Basin.