Oil supplies may come back to the U.S. Gulf Coast in January, sapping crude’s drive toward $100 a barrel, after stockpiles tumbled the most in 30 years this month as refiners sought to avoid year-end tax liabilities.
Supplies in states along the Gulf of Mexico, home to more than half of U.S. stockpiles, have fallen 9.2 percent this month to 167.3 million barrels, data from the Energy Department in Washington show. Oil settled at a two-year high of $91.51 a barrel on Dec. 23, bringing this year’s gain to 15 percent.
“I wouldn’t suspect plus-$90 is sustainable past the middle of January, because I think we’re going to see some stock builds” from Jan. 1, said Ken Medlock, an energy fellow at the James A. Baker III Institute for Public Policy at Rice University in Houston.
Accounting rules allow refiners to take a bigger 2010 tax deduction by cutting stockpiles that have jumped this year as prices increased. Gulf Coast supplies fell in 27 of the past 29 Decembers. They have risen in four of the past five Januaries.
Gulf Coast inventories were 4.1 percent above the Jan. 1 level in the week ended Dec. 17, down from 15 percent at the end of November. The decline so far this month is almost double the 4.8 percent average drop in the past five Decembers.
“I would expect to see more and continued draws into early January and then see those barrels replaced later in January and into February,” said Stephen Schork, president of Schork Group Inc. in Villanova, Pennsylvania.
Oil traded above $90 a barrel for three straight days last week as signs the U.S. economic recovery is gaining pace fanned optimism fuel demand will rise in 2011. Crude for February delivery climbed $1.03, or 1.1 percent on the New York Mercantile Exchange on Dec. 23. Oil last traded above $100 a barrel on Oct. 2, 2008.
Companies typically expense the cost of items they have sold from their taxable income. Many refiners use an accounting method known as “last in, first out,” or LIFO, which allows them to deduct the cost of the more-expensive crude they have purchased most recently and assert for tax purposes that the oil in their tanks was bought before at cheaper prices.
“You don’t want to build large increments at high prices, because what winds up happening is that remains on your balance sheet,” said Scott Rabinowitz, a director at PwC’s national tax-services practice in Washington. “You’re taxed on your net income, your receipts minus your expenses. One of your expenses is the cost of the item you’ve sold.”
In years when prices rise, companies get a bigger tax deduction via LIFO accounting if they manage their supplies so that their inventories at year-end are close to the levels at which they started the year.
“The higher-priced oil that’s going into their storage system is the one they get off the books first,” said Doug MacIntyre, senior oil-market analyst at the Energy Information Administration in Washington, the Energy Department’s statistical arm. “They’re trying to get that crude oil out of their system so they’re not priced on the value of the crude.”
LIFO accounting benefitted oil and gas companies when crude topped $100 a barrel in 2007 and 2008. President Barack Obama proposed eliminating it in the budget announced in January 2009.
The accounting method has been used since the 1930s and is viewed as the most accurate measure of income for financial- statement purposes, according to the congressional Joint Committee on Taxation, a nonpartisan panel, in 2009.
Texas and Louisiana, the two states with more drilling rigs and refineries than any other, provide an added incentive to oil companies to reduce their supplies on hand because companies are subject to local property taxes, based on the fair-market value of oil as of Jan. 1.
The two states are among the minority that impose property taxes on business inventories, according to the Tax Foundation, a nonpartisan policy center in Washington.
“If they’re managing their business efficiently, they’ll pay attention to how much crude oil or distillate or whatever is in storage and try to reduce it as much as possible,” said Michael Cooper, an attorney who specializes in energy taxation issues with Haynes and Boone LLP, the largest Dallas law firm.
U.S. oil imports have dropped 22 percent since July to 8.74 million barrels a day in the week ended Dec. 17, based on Energy Department figures. They tumbled 15 percent in the seven days ended Dec. 10 to the lowest level since September 2008. Imports into states along the Gulf of Mexico have fallen by 28 percent since July.
Total U.S. inventories have plunged 19 million barrels this month to 340.7 million in the week ended Dec. 17, poised for the biggest monthly decline since December 2006. Stockpiles were 4.1 percent higher than at the start of the year, down from 9.9 percent at the end of November, Energy Department data show.
“There may be some movement in inventories to adjust for these things, but there’s much more movement in inventories for normal day-to-day business reasons,” said Bill Day, a San Antonio-based spokesman for Valero Energy Corp., the largest U.S. refiner. “There’s much more demand in the summertime, so you may build up inventories in the middle of the year and then draw down inventories at the end of the year.”
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