United States oil inventory numbers have been released, and inventories are 10 million barrels up in gasoline and 5 million down in crude oil -- but what does that mean in practical terms?
In this video segment, Sean O'Reilly, Tyler Crowe, and Taylor Muckerman explain what the stockpile means in terms of daily consumption, how the numbers between crude and gasoline add up together, how the market has responded to the numbers, and what decline rates are and how they factor into the picture.
A full transcript follows the video.
This podcast was recorded on Jan. 7, 2016.
Sean O'Reilly: Tyler, I asked you yesterday about the oil inventory thing. I saw the release of crude oil inventories, and it was down 5 million barrels, and I was like, "Oh, that's awesome, good for them." But then gasoline was up 10 million barrels, and apparently that's bad, and I didn't even know about it.
Tyler Crowe: Yeah. So I think, this week, we had, like, a 5% move in oil. And the biggest reason that anybody could come up with was the fact that gasoline inventories in the United States had gone up by 10 million barrels after the week's previous data that said that crude inventory barrels were down 5%. So everybody got a little excited, like, "Yay! The turn's starting to come!" And then they saw gasoline inventories up.
O'Reilly: What does that mean?
Crowe: Well, let's just keep this in a little perspective here. We'll say down 5% in crude, up 10% in gasoline. So we're net up 5%.
Taylor Muckerman: Until that gasoline turns into CO2, it's basically an oil stockpile.
Crowe: Yeah, it's some sort of petroleum stockpile. So, we're net up 5%. The United States burns through 15 million barrels a day of gasoline, diesel, anything that's made out of crude products. So, we had an inventory build of eight hours' worth of consumption, and the market drops by 5%.
O'Reilly: That's insane. Arguably.
Crowe: It's one of those things where it's a law of large numbers, where people say, "Oh, we had an inventory gain of 10 million barrels," and when you have 10 million barrels, it's like, "Holy cow, that's a lot of oil!" But when you put it in perspective of how much we consume or produce on any given day, it's not even half a day's worth of consumption.
O'Reilly: Right. So, supposedly, we are oversupplied in inventories by, what, 2 million, 3 million barrels?
Crowe: Something like that.
O'Reilly: That's a couple months, right?
Crowe: That's the hope. Long-term focus, decline rates are happening. There's lack of investment.
Muckerman: SandRidge delisted.
Crowe: Did they?
Muckerman: They did.
O'Reilly: They're Pink Sheets now, right?
Muckerman: Yeah, it's in the process of being delisted. So, big names are falling.
Crowe: Production budgets are going down, it's not reinvesting, decline rates are going to happen, and when it finally catches up ...
O'Reilly: For our listeners who may not know, real fast, what's the decline rate?
Crowe: Decline rate is the natural decline of a well where, once you put a well in the ground and it starts to produce, there is a fixed amount in that reservoir, and the rate at which it leaves, the pressure, the physical properties of that, will deplete, and it means that the rate that's coming out of that will decline.
O'Reilly: It's like, when you're emptying a pool, that last bit of water does not come out fast.
Muckerman: Imagine a super-steep water slide you're scared to go down at a water park--
O'Reilly: That I'm still afraid to go down.
Muckerman: -- that's the decline of most frack wells, where it's like, vooosh!
O'Reilly: It's like 70% or something.
Crowe: Yeah, 70% in the first year.
Muckerman: It's a frightening decline rate.
Crowe: So, as that decline rate happens, production will slow down, and demand will start to come in to that equilibrium, maybe demand will outpace for a little while. And prices will rise. We don't know where that balance is going to be found again --
O'Reilly: Have you seen any estimates? I think we peaked out at like 9.6 million barrels a day in the U.S. for production, I think we're down to 9.1 million. Have you seen any estimates where we'll be at the end of --
O'Reilly: OK. No big deal, I was just curious.
Muckerman: If we did ...
O'Reilly: "Oh, I know, I'll put in a million dollars!"