Prices Rise Despite Inventory Build

Jim Brown
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No stealth rally in Crude today. WTI rallied to $108.65 before easing back a few cents at the close.

The declining dollar propelled oil, gold and silver to new relative highs and there appears to be no end in sight. The dollar index declined 0.7% to close on the 100-day average at 78.66 but odds are good we will see a support test at 78.0 soon and eventually adecline back to the summer lows at 74.0.

WTI crude oil rallied to $108.65 at the close and that is where it ended at the high of the day. WTI is now up +$12 since the February lows at $96. There is a clear breakout in progress and the $114 highs from April are clearly the next target.

WTI Crude Oil Chart

The evil speculators came back to the headlines today as market reporters looked for some reason behind the rise in oil prices. Many of these people need to get a real job making donuts or recycling aluminum cans because they are definitely not qualified to report on the market. There are many factors pushing crude prices higher and it is not speculation. Granted the momentum traders have caught the wave but with the millions of crude futures contracts traded each week it is next to impossible for us to move the market.

If you are reading this newsletter you know the reasons for the rise in crude. Iran, Syria, Nigeria, Egypt, Sudan, exploding demand in China and better economics in the U.S. suggesting the recovery is accelerating. Add in the sharp -1.8% decline in the dollar just since Feb 16th and you have multiple reasons for rising crude prices.

The EIA inventory report this morning showed a gain of +1.6 million barrels. That caused a dip in prices to $105.45 but it was very brief. The dip buyers showed up in volume and it was straight up from there.

Gasoline demand rose by 461,000 bpd and refinery capacity rose from 84% to 85.5% as refiners added to capacity to cover that demand increase.

Gasoline Demand Chart

Crude demand increased by 170,000 bpd but it remains -6.7% below year ago levels. Consumers have changed their driving habits since the recession and with 12 million people out of work there is no discretionary income to support vacation trips, daily shopping trips or just plain joy riding in the case of teenagers.

Inventory Snapshot

The rise in crude prices is producing a concurrent rise in gasoline prices. The EIA reported gasoline prices averaged $3.59 per gallon as of Feb 20th. That is probably closer to $3.65 today. Gasoline prices are at record levels for this time of year. California experienced a 20-cent increase in just the last week. That was the second largest weekly increase since the EIA began collecting data. Diesel prices averaged $3.96 per gallon, $4.16 on the west coast. That average is 39 cents higher than the same period last year. Heating oil rose to $4.04 and 43 cents over year ago levels.

Gasoline prices are not likely to decline in the near future. Prices in the $4.50 to $5.00 rage are expected and democrats are calling on President Obama to release oil from the strategic petroleum reserve to force prices lower. Clearly they don't understand the meaning of "strategic." It is not the "lower prices to get votes" reserve. It is for emergencies like we could experience if fighting breaks out in Iran and the Strait of Hormuz ends up blocked by a couple tankers sunk in the waterway. That would push prices to $150 or even $200 depending on the severity of the event.

High prices are here to stay so get used to it. These prices will weigh on the global economy and especially the USA. Expect lowered earnings from S&P companies for Q2 and Q3 and a good possibility of a significantly lower equity market over the summer.

Jim Brown

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