Inventory Roulette

Jim Brown
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The next two weeks of inventory reports are going to be a mess that could favor higher prices. The Houston ship channel was closed for part of last week due to fog and this week there was a collision in Port Arthur that has kept the channel closed since Saturday.

The Houston area is home to many refineries and the flow of ship in and out of the various ports and channels around Houston is a constant threat to import flows.

On Saturday an 800-foot tanker headed for Exxon's refinery in Beaumont collided with a vessel pushing two barges. The resulting 460,000 gallon spill closed the Sabine Neches Waterway near Port Arthur. As of late Monday the spill was mostly contained in a 2-mile stretch of this waterway. Over 220,000 gallons of oil have been recovered by 60 vessels and over 550 workers.

The channel sees about a dozen tankers move through the waterway each day. The four main refineries served by this channel have a combined capacity of 1.2 million barrels per day. They are also served by pipelines as a backup.

The Texas Land Commissioner Jerry Patterson said the remaining closure period would be would measured in days, not weeks. Texas cannot let any oil escape the channel into the gulf because of the fragile marine environment around the coast. The area has seen major spills in the past but none in the last 20 years and the marine life is returning to normal.

Currently there are 13 tankers waiting offshore to get in and 11 tankers waiting to get out. As each day passes the number of tankers lining up in the gulf will increase and once reopened the channel will become a major traffic jam.

The closure of the Houston ship channel for fog for two days last week and the closure of the Sabine Neches channel since Saturday and probably for several more days is going to severely alter the normal imports of oil next week. The events happened after the cutoff for reporting on Friday January 22nd so this Wednesday's reports will be minimally affected other than one day of fog.

Next week's reports could be severely impacted depending on when the Sabine Neches reopens. As of Monday night the coast guard said there is no timeline for reopening the channel with only about half the oil recovered so far. It could easily be closed for the rest of the week.

The refineries impacted are ExxonMobil's 344,500 bpd plant in Beaumont, Valero's 310,000 b/d, Total's 232,000 b/d and Shell's 285,000 bpd plants in Port Authur.

Crude traders said the tankers waiting may start to defect to other ports if the channel is not reopened by Saturday. This would put pressure on some prices as tanker owners were forced to dump their cargoes to any willing buyer so they can return to sea and maintain their scheduled routes. They can't afford to sit in the gulf for weeks because they have firm commitments for future loads. Traders said it would not impact oil prices specifically but prices for individual grades since some refineries are not setup to process specific grades and ports and pipelines operators would take into account future storage and transportation before bidding for the excess oil waiting in the gulf.

Hypothetically imports are falling by about 1.2 mbpd since Friday. If the shutdown continues through this Friday that could be a drop of over 8 million barrels. While you and I understand the reason behind the drop the normal retail investor will here about the big drop and think there is a pending shortage of oil and bid prices up. The other wild card is the inventory number for last week. We did not get a major build in the prior week and that suggests this Wednesday's inventories could be large in historical trends continue.

We could be setting up to get a large build this week, a large decline next week and then a monster build the following week as all those ships waiting at sea unload in rapid succession. It should create some serious volatility in crude prices for the next three weeks.

Jim Brown