Oil Imports To Be Taxed: OIL, USO, CHK

Weekly Oil Supply Data was reported today by the EIA and it showed a stockpile build of 5 million barrels, pressing our domestic stockpiles in the United States even higher and into levels that many people consider to be bearish for oil prices.

Within this data we also learned that domestic producers only produced about 20,000 more barrels per day than they did the previous week, largely in line with estimates, so the jump wasn't due to domestic production.

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In addition, refineries actually increased their inputs, which would cause a draw from stockpiles if everything else was held constant, so the issue at hand is not related to refineries either.

With those two variables checked off the list, we're left with the third, and seemingly the most volatile of the three components that govern stockpile observations, and that is imports.

This has been the wild card all year, and in this most recent report oil imports increased by 905,000 barrels per day.  The rationale for the build in U.S. stockpiles was almost solely due to imports.

This raises a serious set of questions pertaining directly to the America first policy promoted by Donald Trump, relating specifically to the creation of jobs in the energy sector.

Oil prices are directly related to the ability companies within the sector have to create jobs.  The cost of production must be less than the price of oil sold per barrel for a driller to make money, for example, and reasonably the push higher in oil prices late last year has brought the price to the margin at which more expensive drilling operations might actually be profitable.  We know costs have come down too, a year ago speculators suggested that $70.00 was the breakeven point, but costs have been cut more dramatically and in doing so it appears as if the line in the sand for higher cost producers is slightly over $50.00 now.

Many of them may have hedged against a decline in price when oil was recently over $50.00, but some may not have, but neither of those is directly related to the creation of new jobs.  Bringing on new employees in the space will only happen if confidence exists, and that means producers need to be confident that prices are not going to plummet, because if they do they will not be able to make money especially after adding additional costs associated with new employees even after heir hedges expire.

The problem here is that the United States is not currently able to control oil prices independently and that is largely because of the imports of oil.  If that changed and imports were tapered so they did not cause gluts in domestic stockpiles three important things would happen:

  • Prices would be much more stable.
  • More production would come directly from the United States
  • More jobs would be created in this space.

The rationale for the increase in stockpiles over the past week was the 905,000 barrels per day of additional oil imports.  That equates to about 6.3 million barrels over the week observed in the latest report, which is more than the 5 million barrel stockpile build.  If oil imports simply remained constant compared to where they were the week before there would have actually been a draw in U.S. stockpiles of approximately 1.3 million barrels.

The Trump Administration need look no further than the importation of oil to create additional jobs in the space. 

Contracts are in place to import oil, and it is unlikely that Donald Trump would disturb any relationship with Canada, the main source of imports of oil into the United States, but other countries they not be treated the same, and on margin those additional imports beyond Canada's arguably are what is causing the excess too. 

We see a tax being levied on almost every source of imported oil aside from Canada accordingly. 

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