Crude Oil Prices and Taxes: Why Prices are Falling Despite Inventory Draws
Crude Oil Prices and Taxes: Why Prices are Falling Despite Inventory Draws
Crude oil prices fall despite big U.S. stockpile decrease
- U.S. crude oil stocks see larger-than-expected draw, according to EIA.
- A drawdown is likely because of seasonal factors around taxation.
- The pullback in crude oil prices on the data explains this market behavior.
The U.S. Energy Information Administration (EIA), on Thursday, reported a 6.9-million-barrel decrease in crude oil stocks for the week ending Dec. 22. That was nearly triple the expected draw of 2.7 million barrels. Despite the larger-than-expected drawdown in oil stockpiles, crude oil futures (/CLG4) accelerated an earlier selloff.
At first, this seems counterintuitive to how markets function. Typically, a decrease in inventory—all else remaining equal—would cause prices to rise following the law of supply and demand. A price increase is even more common when results exceed expectations, which was the case this week. So why are prices still declining?
Fundamentals are weak but the data shows a seasonal effect
The first thing to consider is that the fundamentals around crude oil markets have been deteriorating amid weaker consumer demand. However, something more specific is likely at play, and it has to do with seasonality in the U.S. market, specifically in the Gulf Coast, where a large amount of crude is held, refined, and exported.
EIA data going back to 1981 for the Petroleum Administration for Defense District three (PADD 3—Gulf Coast) show December sees an average drawdown of nearly eight million barrels. That is the largest average monthly drawdown for the year (see chart below). But demand doesn’t increase enough on a seasonal basis to explain the outsized drawdown in inventories, or at least not enough to explain the phenomenon.
The taxman cometh, and the oil man giveth away
What is causing these drawdowns? We don’t have to look any further than Uncle Sam. That is right, taxes. The taxman taketh, and the oil men giveth away. Crude oil inventories are subject to taxes, and Dec. 31 is the assessment date for those stocks. PADD 3 holds a large amount of U.S. total inventory, explaining why we see the decrease here in December. It is because oil companies are offloading to reduce tax exposure.
These oil companies can do this by moving imports to the month after or before the assessment date, increasing refinery run rates, moving crude out of the taxable region, or a combination of these measures. Since the next reporting week also includes days in December, we will likely see inventories decrease again since the PADD 3 region may move import volumes to January.
Check out my 2024 Oil Market Forecast.
Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater
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