US Oil Supply Draws Expected to be Big: UCO, SCO

May 09, 2016, 13:40 pm ET, BY Thomas H. Kee Jr- Editor, Stock Traders Daily| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

There's plenty to discuss today in the oil space, but one of the topics that seems to be driving price immediately revolves around US supply builds.  This is a topic that must be properly addressed because some people are misinterpreting what is happening.

This data is backward looking, and it absolutely suggests that inventory builds have taken place, rightfully so, but there is about to be a massive draw in US inventory, and that is directly related to what has been happening in Canada.  The Canadian fires have taken a substantial amount of the supply off line, oil that would otherwise have been sent to the United States.

Almost all of the oil produced in the oil sands of Canada is exported to the United States and therefore changes to the supply of oil from Canada will impact the inventory levels in the United States as well.

Since last Friday approximately one million barrels per day have been off line, and that is expected to continue for the foreseeable future.  Thus far, approximately four million barrels of oil that would have been transferred to the United States have not come and will not come.

We absolutely expect Canadian Oil sands producers to begin production again and ramp back up to their pre fire levels once the authorities approve the area for safety and employees are allowed to return, but that process will also be slow and an immediate ramp back up to pre fire levels is unlikely.

We believe that this will cause a draw to U.S. inventories and is doing that already. 

EIA data suggests that approximately 1.8 million barrels of oil have been added to U.S. inventories on average over the past six weeks, and during that time the United States was importing approximately two million barrels of oil per day from Canada directly from the oil sands.  Now, we know that approximately one million barrels per day have already been taken offline and are expected to stay offline for the foreseeable future, so the imports from Canada have been reduced by four million barrels already.  Simple math tells us that if the weekly average build was 1.8 million barrels when Canada was producing and importing without disruption, the net draw will be more than five million barrels per week so long as disruptions continue to impair Canadian production by one million barrels per day. 

However, with expectations of a prolonged outage in Canada, some suggesting months, but ours being approximately one month, that weekly draw could extend long enough to reach the summer months officially, where in June demand for oil increases based on summer driving seasonality.

Although investors seem to be looking at their feet in terms of this inventory observation today, it is our opinion that inventory drawdowns are coming immediately and they will likely last long enough to see demand ramp up and prevent any meaningful inventory builds for the foreseeable future.

Full Disclosure: Stock Traders Daily operates a DIY strategy called LOTS which may hold ProShares Ultra DJ-UBS Crude Oil (NYSEARCA:UCO) or Proshares Trust II (NYSEARCA:SCO) at any time.  We notify clients of changes but do not announce changes publicly.  At the time this article was written the strategy had engaged UCO.

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