Expect Volatility in Oil Prices

Jim Brown
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Oil prices should continue to rise. Saudi Arabia is producing at a 30 year high but global supplies declined -200,000 bpd in February according to the IEA. The IEA expects Iranian crude exports to decline by at least 800,000 bpd by July as buyers cut back on purchases to avoid U.S. and EU sanctions. Other analysts believe it could be more because of the lack of tankers, insurance and payment methods that will restrict all but the largest buyers from doing business with Iran.

The IEA sees demand growth stable at +0.9% but I fear the increase in demand by Saudi Arabia to produce electricity this summer will be the deciding factor. Typically Saudi increases demand by more than 1.0 mbpd during the hot summer months to produce electricity and run the desalination plants. Taking one million barrels out of the equation for the four high demand summer months could really tighten supplies and prices.

Crude prices are just passing time as we wait for the next leg higher. Brent continues to hold at $125 despite alternating days of volatility.

The price of WTI declined -1.20 today after the EIA inventory report showed a huge build in inventories at Cushing. The Oklahoma oil hub has seen inventories rise +10 million barrels since January 20th and the largest eight week build since early 2009. The current 38.7 million barrels is the highest level since June 2011. The highest inventory on record according to the EIA was 41.896 million barrels on April 8th 2011. The buildup of inventory at Cushing is reaching levels where it will impact the price of WTI as we approach expiration on March 20th. We have not seen a lot of crude buying by traders with the intent to store it until the following months because the future months are trading relatively close to the current month in terms of price. However with expectations of rising prices as we move towards summer there may be some traders trying to buy the dips looking to store it until May when prices are normally higher. If storage is full they can't do this.

Pipeline operators have been frantically adding capacity to Cushing over the last couple years with roughly 15 million barrels added or under construction in 2011 to bring the total capacity up to 66.46 million barrels. I am not sure how much of this was completed as planned.

Cushing Operators

Crude inventories rose by 1.8 million barrels to 347.5 million and the highest level since September and right in line with the historical profile as refiners try to sell down winter blend fuels while the refineries are down for maintenance to convert to summer blend fuels. Crude supplies should continue to rise until late May or early June.

Crude Oil Chart

Gasoline inventories declined -1.4 million barrels for the fourth consecutive weekly loss. Gas is declining as winter blends are depleted. This is not an event that should move the market. If gasoline was declining because of increased consumption then it would be bullish. This is just a seasonal trend. However, gasoline demand did rise by 153,000 bpd.

Gasoline Inventory Chart

Distillate inventories, (diesel, jet fuel, heating oil), declined by -4.7 million barrels for the fifth weekly loss. Demand rose by +287,000 bpd, production fell by -76,000 bpd and imports fell by -30,000 bpd. This decline is in line with seasonal trends but it should have been supportive to prices because the average trader just sees the inventory drop and does not understand the trends.

Distillate Inventory Chart

The key points in the table below are the Cushing inventories and the decline in the refinery utilization to 82.7%. That number should continue to decline through March and early April but it is already at seasonal lows. Any significant decline from here could be a worry for gasoline prices.

Inventory Snapshot

Gasoline prices ticked up again to $3.83 per gallon and 26-cents higher than the same period in 2011. The Rocky Mountain region finally cracked under the pressure of higher oil prices and the average price for gasoline in the region rose to $3.48, a gain of +15 cents for the week and +28 cents over the last two weeks. The East Coast price rose only a penny to $3.77 and the West Coast rose +2-cents to $4.22. The Gulf Coast is now $3.65. RBOB gasoline futures closed today at $3.35.

The average price for diesel rose 3-cents to $4.12 or 22-cents higher than the same period in 2011. The West Coast led the surge with $4.42 per gallon and the Midwest the lowest at $4.02.

Brent crude futures for April expire on Thursday but no specific volatility is expected. The May contract at $124.43 is trading 50-cents below the expiring April contract at $124.93.

Jim Brown

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