OREANDA-NEWS. December 07, 2015. Record US crude oil inventory levels in 2015 reminds us of a pig crossing paths with a python. The pig is consumed by the snake, bulging in the reptile’s stomach as it goes through the digestive process, and is a handy parable for oil markets.

In 2015 US refineries took unprecedented bites out of the US crude oil glut that was largely the result of higher domestic production levels. But while these python-like refineries have increasingly been built to take a more variable diet, the pigs are getting larger and possibly outgrowing the refineries’ ability to digest the upcoming portions.

If we follow the path of the American oil python as it chomps down on the 2015 crude glut, we’re left with questions about what it means for 2016. Will the fat oil glut prove too big for the mighty refinery python? Or will the refining sector just end up with a New Year’s hangover and a bad case of indigestion?

Assessing the prey

The reticulated python of Southeast Asia is known to swallow its prey whole after squeezing the life out of it. However, before starting the swallowing process, the python must wait for the right opportunity to ambush its prey, wrap around it and clench hard.

The refinery python found easy prey in 2015. US crude oil production has grown so much that it is higher than the rest of the global incremental growth combined. Total US crude stocks reached record highs in the first quarter of 2015, resulting in record refinery utilization levels. In just the PADD III region along the US Gulf Coast, year-to-date crude oil stocks jumped 19% compared to year-ago levels to stand at 230 million barrels – or 27% higher than the five-year average.

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For the American refiner, the rising production and lower prices came as a feast as they managed to squeeze out proportional superior refining netback margins. Netback margins for LLS and Mars in the US Gulf Coast doubled year-on-year when analyzed as a percentage of the crude’s outright value.

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To make a comparison, after lean years of hunting for mangy rodents and the occasional stray cat, the python stumbled on a porker practically asking to be devoured. So the python obliged as US refineries took more crude volumes into their daily diet. Refinery inputs of crude in PADD III are up 10% when compared to 2010 and 7% higher than the five-year average.

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The big question for many in the oil industry this summer was whether the 2015 catch was actually a pig or something more fierce and destructive – like this alligator swallowed by a python in Florida.

Swallowing the pig

The 2015 crude supply is shaping up to be a formidable feast thus far, and although the python has become quite effective at digesting the meal, the food is piling up. PADD III crude oil stocks during the fourth quarter are 29% higher than year-ago levels and are on the way to beat the 2015 record highs. At a modest 13% growth, we could expect crude stocks in PADD III to reach 280 million barrels by the second quarter of 2016.

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Although the crude glut reached a record high in Q2 2015, it has not translated into a comparative refined products glut. Combined refined products stocks in the US Gulf Coast reached 275 million barrels during Q2 2015, and although it is significant, it represents just 5% more than the five-year average and it is actually marginally less than 2010 levels. So what gives? Where did the pig go?

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Make way for a bigger snake

US refined products exports in 2015 have more than doubled since 2009 and are 8% higher compared to year-ago levels. But crude oil stocks continue to build.

The good news for the American economy is that both US refiners and drivers have increased their capacity to consume in 2015.

“Luckily, the python appears to be getting fatter, with total US refining capacity expected to grow another 300,000 b/d year-on-year in 2016,” said Tony Starkey, manager of energy analysis at Platts unit Bentek Energy.

US gasoline demand went from strong to stronger in 2015, as consumers leapt on lower gasoline and diesel prices and purchased larger vehicles. Refined products demand growth also appears strong in the world’s key growth regions: India and China.

“The real question is whether demand can continue to grow at the breakneck speed at which it did in 2015, or was this largely a one-off boost due in large part to the elastic demand for oil?” Starkey said.

It appears that US consumers are not the only ones paying attention to prices at the pump. Global investors are putting the brakes on capital spending that would otherwise bring additional crude volumes online.

If we see less crude oil on the market in 2016 and continued strong demand growth, we may see the market draw closer to a new supply-demand balance. The fat python may be here to stay.