Fog Clouds Inventory Issue

Jim Brown
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The inventory dip due to fog that shutdown the Houston ship channel was not supposed to hit until next week's numbers but according to analysts that is why imports dropped so sharply in this week's report. Do they know for sure or were they just guessing?

Regardless of the reason for the drop the crude oil inventory levels in the EIA report fell by -3.9 million barrels for the week ended January 22nd. Platts was expecting a two million barrel build. Distillate inventories rose by 400,000 barrels compared to an expected decline of 1.8 MB. Gasoline inventories rose by 2.0 million and slightly ahead of expectations.

The key point in the table below is the build in gasoline over the last four weeks of 13.5 million barrels. This should depress the price of gasoline, weaken crack spreads and eventually pressure oil prices. Also note the refinery utilization rate for the last two weeks. Gasoline supplies are building even though the utilization rate is dropping.

EIA Inventory Table

Gasoline prices did fall for the second week to a U.S. average of $2.71 per gallon, a 3-cent decline from the prior week. That is still 87-cents over the price a year ago this week. The amount of gasoline in inventory normally climbs this time of year as refiners add to stocks ahead of the spring maintenance cycle. In the chart below the blue line is the five-year average and the red dotted line is the current levels. The second chart shows the current demand trend in red and the 2008 demand in blue.

EIA Gasoline Inventory

EIA Gasoline Demand

A better example of the slowing demand for crude products is the chart below, which shows the imports of crude this year compared to last. The red line is the current import trend. Crude imports fell to 7.867 million barrels per day last week compared to 9.708 mbpd for the same week in 2009. That is nearly a two million barrel PER DAY decline and the trend is still dropping. When the numbers for next week are posted it should be much lower due to the closure of the Sabine Neches ship channel for a week.

EIA Crude Oil Imports

The first ship to move through the waterway today was a vessel leaving for the open sea. The coast guard said 11 ships have to exit the channel at a snails pace to avoid stirring up the remaining oil before the 16 waiting in the gulf can enter. Those incoming tankers will start leaving their parking orbits in the gulf and making their way toward the channel. There is a 24 mile long no wake zone where each ship must creep along at less than 5 miles per hour to avoid the oil booms and cleanup processes.

Crude prices rallied slightly on the unexpected drop in inventories but could not return to resistance at $75. Sellers appeared shortly thereafter and once stops were hit at $74 the plunge accelerated to bottom at $72.65 and a six-week low.

The dollar rose to a new five month high on the dollar index and all commodities took a beating. Worries over the falling Euro are pushing the dollar higher as well as talk of budget cuts in the USA. It is just talk but currency traders the world over only get the headlines not the actual details.

The IEA has agreed to meet with OPEC, banks and U.S. and U.K. regulators in Tokyo in February to discuss ways to limit energy price speculation. The CFTC and the U.K. Financial Services Authority will take part along with Lawrence Eagles, the head of commodities research at JP Morgan. The two-day meeting will discuss ways to limit speculation while allowing reasonable trading volumes to continue. Reportedly it was speculators that sent prices soaring to $147 in 2008. However, speculative net-long positions in oil futures were the highest in 27 years for the week ended Jan-12th and prices only hit $83 this time around.

As regulators try to decide what to regulate there are some traders moving out of energy. At Nymex, financial traders slashed 20% of their short positions, or bets that prices would fall, and 15% of their long bets in the fourth quarter of 2009, according to CFTC data. That contributed to a 13% decline in total outstanding contracts for crude oil. As volatility dried up, more traders moved "some of their allocations toward equities and elsewhere," says Ryan Cournover, head of energy trading at Lighthouse Financial Group, a New York investment bank and securities firm. Some returned in January to build positions for the new year. Open interest rose 4% this month, but still is down 9% from the end of September.

There are signs that traders are betting on a new leg down for oil prices. Jeff Grossman at BRG Brokerage in New York said his firm saw increased buying of put options late last week, or options that give an owner the right to sell at a certain price, as investors tried to protect against a further downward move for oil. However, others see higher prices for crude. On Monday, Morgan Stanley in a research note predicted oil would reach $95 a barrel by year-end. According to Citigroup, exploration-and-production companies are 33% hedged on projected production for the next 12 months, up from 22% at the end of 2008. Southwest Airlines, Newfield Exploration Co. and Chesapeake Energy Co. all recently said they have increased their hedging positions to protect against price swings.

Most arguments for rising prices center on predictions for strong economic growth. Merrill Lynch assumes a fairly robust global economic growth rate of 4.4% in 2010 and 4.5% in 2011. Merrill's views on the economy, and oil prices, are similar to those at Goldman Sachs and Barclays. The bank also feels interest rates will remain low. That means more liquidity and faster growth in the developing world, said Francisco Blanch, head of global commodities research at Merrill. To a lesser extent, it could also lead to more investment interest in commodities. "As the private sector resumes its role as an engine of global growth in the second half of 2010, we see oil prices averaging $92 a barrel and potentially breaking through $100 a barrel as we enter 2011," Blanch wrote in a recent research note.

Analysts at Deutsche Bank's commodities unit average various economic growth forecasts to arrive at a rate of 3.2% - lower than Merrill's 4.4%. Deutsche feels the threat of rising interest rates will lift the dollar, causing oil prices to fall. The bank has also argued in previous reports that efficiency gains made over the last few years will dampen oil demand, even when the economy expands. The bank is predicting prices in the last quarter of the year will average $60 a barrel. While prices will steadily rise after that, the bank doesn't expect prices to average over $100 a barrel until 2015. "We remain cautious about the oil price outlook for 2010," Adam Sieminski, chief energy economist at Deutsche, wrote in a recent research note. "The markets remain delicately balanced, we expect some weakness." DB also believes Saudi Arabia will throw some of its excess production into the market if oil prices start to move over $80 in an effort to keep prices level as long as possible. They don't want another price spike to further reduce demand.

Most analysts agree that crude prices will be over $100 in 2011 and quite a few are projecting $150 in 2012. Once global growth picks up speed so will oil consumption. China will produce and sell more cars in 2010 than the U.S. and they are still building roads at a record pace. Within five years they could double their consumption of oil without government controls to slow the pace of transportation expansion. In five years they will have sold nearly 75 million more cars and those cars don't run on water.

Jim Brown