Takeaway: A sequential decline in U.S. production won’t be steep enough to curb the supply glut that will continue into the Fall Season.

To answer our own question on when a domestic production slowdown will give a lift to crude oil prices, a rolling over of U.S. production would have to be much more drastic from a first and second derivative perspective for a fundamental and psychological price floor to develop.


Domestic production IS rolling over, but U.S. production remains resilient with production per region continuing to show lopsided Y/Y gains vs. what could (even optimistically) be absorbed:


DOMESTIC CRUDE PRODUCTION: LOTS OF IT....STILL - Regional Production and Rig Table


The headline numbers from the EIA for monthly production have been scrutinized, but all production reported is subject to more accurate revision. In May and June the EIA upwardly revised previously reported production numbers for March and April. Data reported for August now shows the opposite type of revision. Previously reported production numbers have been downwardly revised.

The most updated production data shows that vs. June’s release, updated production levels for August have been downwardly revised for March, April, May, and June.




An ongoing argument continues as to whether the supply glut is in fact an excess of oil being produced or if the demand picture is just that poor. Arguments can be made for both, but for several reasons below we outline why overproduction will continue to overpower both demand for tight oil and infrastructural capabilities in the near future.

Production may be rolling over, but considering the fact that inventories still remain near all-time highs after going through a seasonal summer drawdown where motor gasoline consumption recovered to near pre-crisis levels and refinery capacity utilization touched all-time highs, it’s hard to argue weak DEMAND for refined products is the stronger factor contributing to a supply glut. Even after this week’s big draw, it’s reasonable to expect inventories to move right back to all-time highs, testing the logistical ability to deal with it.


DOMESTIC CRUDE PRODUCTION: LOTS OF IT....STILL - Refinery Inputs Vs. Utilization


DOMESTIC CRUDE PRODUCTION: LOTS OF IT....STILL - DOE Regional Inventories Bar Chart and Map






How much more crude will refineries eat up now that 1) the summer driving season is over; 2) we’re entering refinery maintenance season? Despite a big draw this week, inventories are expected to tick higher by seasonal default, but how much higher can they go anyway?

A newsy topic in the spring, the big build-up in inventories was centered on the Cushing, OK build where inventories are currently +180% Y/Y.  




Refiners continue to develop more storage capacity which can’t happen fast enough:

  • Aggregate working crude oil storage capacity is +2.9% Y/Y
  • Tank Farm storage capacity in Cushing is +6.1% Y/Y

Even so, transportation and the light/heavy processing problems in the Gulf are stickier problems that face near term constraints.

If a seasonal inventory build commences, Cushing inventory levels have the potential to move to concerning levels again with the lack of infrastructural ability of gulf refineries to handle a continued increase in crude flows from America’s main trading hub in Cushing.

Refinery maintenance season is around the corner at the same time gulf refineries are trying to reconfigure to adequately handle the influx of tight oil (domestic shale) over traditional, heavier imported crude.  

For evidence of the problem, Genscape estimates that both the Kinder Morgan Crude and Condensate Pipeline and the Eagle Ford pipeline from Eagle Ford to Houston are only running at half of nameplate capacity because of congestion inhibiting crude to bypass Houston to Louisiana refineries via pipeline. Much of it is being transported by barge and oil tankers, a much more expensive form of transportation.  

A new deal like the Swap agreement with Mexico’s state-run Pemex (U.S. swaps tight oil for heavier crude capable of being processed by gulf refineries) will temporarily help the infrastructural mismatch in Houston, but the bottom line is that storage and transportation capacity constraints will creep back into the picture moving into the fall before adequate infrastructure is put in place.

Ex. A currency catalyst to devalue the USD and support prices (which is highly possible for a brief relation trade: see our recent note), we expect deflationary macro headwinds and the fundamental supply picture domestically to continue pressuring a sustained price recovery into the fall season. The forward curve reflects this shift in psychology which usually happens the longer the "unbelievable" becomes a reality. The curve is flatter 1,2,3-years at this lower low than it was at the January and March lows in WTI.


DOMESTIC CRUDE PRODUCTION: LOTS OF IT....STILL - forward curve comparison graph




Ben Ryan




7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more