(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON, April 24 U.S. crude stocks held by
refiners, traders and pipeline companies have hit the highest
level since the Great Depression, as refiners hold out for
cheaper prices before they take in more domestic oil.
Stocks rose 3.5 million barrels last week to almost 398
million barrels, according to the latest data from the Energy
Information Administration (EIA). It is the highest volume of
crude in commercial storage since weekly records began in 1982
Based on monthly records, it is probably the highest since
1931, when the country was in the midst of the depression and
crude was gushing from the newly opened East Texas field (Chart
Record stocks have been piling up on the Gulf Coast, home to
the country's biggest refineries. But "with parts of the
refinery system continuing to require heavy and sour foreign
crudes, insufficient volumes of imports are being displaced by
indigenous supplies to prevent stocks building", BNP Paribas
Chart 1: Crude stocks since 1982:
Chart 2: Crude stocks since 1920:
Crude inventories normally build at this time of year as
refineries take advantage of the lull in demand between the
winter heating season and summer driving season to take some
units offline for planned maintenance.
Stocks have risen by 37 million barrels since the end of
December, which is fairly typical. But inventories ended 2013 at
an unusually high level, so even an average stock build has been
enough to push them to an 83-year high.
Inventories usually continue rising until late May or early
June, when refineries ramp up throughput to maximise gasoline
production after the start of the driving season on Memorial
Past experience suggests stocks could build by another 5-10
million barrels, topping 400 million barrels in the coming
WRONG OIL, WRONG PRICE
Beneath the relentless rise in U.S. oil stocks is a
disconnect between the type of oil that the United States is
producing and the type that U.S. refineries want to process.
Refineries use linear programming to tell them which crudes
to purchase, based on their configuration as well as the current
slate of dozens of different crude and product prices.
The resulting computer models contain thousands of
equations, which help them determine the most profitable crudes
U.S. crude, especially the light crude being produced from
shales such as Eagle Ford in Texas and Bakken in North Dakota,
typically costs more than the heavier crudes still being
imported from Canada, Mexico and Saudi Arabia, and produces a
less valuable mix of products.
Light oil cannot be exported (except to Canada) because of
the longstanding ban on crude exports, so it must be processed
internally or put into storage.
U.S. refiners could process more domestic crude, but most
prefer to continue processing heavier imported oils as well,
because it is more profitable.
Shale oils are mostly light. On distillation, they yield a
high proportion of light fractions suitable for making gasoline.
The yield of medium and heavy distillates useful for diesel and
heating oil is far smaller.
Traditionally, gasoline has been the premium fuel in the
United States, but U.S. refineries can now earn more from
So the big Gulf Coast refineries have been redesigned to run
on heavier crudes, cracking and coking them to produce more
Gulf refineries want to buy cheap distillate-rich crudes and
crack them to produce lots of premium-priced diesel - not
expensive light crudes and process them into lower-priced
To some extent, refineries can cure the problem by
processing a blend of light domestic oils and heavy imported
But that means there is a limit to how much light domestic
oil the refineries want to use, and they need to continue
importing heavier oils.
To clear the emerging glut, refineries will have to be given
an incentive to run light domestic oil, which means it must
become cheaper relative to imported grades of both light and
(editing by Jane Baird)