Demand Increased, Imports Decreased

Jim Brown
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Crude inventories fell last week with the biggest decline in months. Unfortunately it was not because demand is soaring.

Crude inventories fell by 4.3 million barrels to the lowest level since May 18th according to the EIA. There was an increase in demand for gasoline and distillates but the main reason for the decline was a reduction in imports and a drop in U.S. production.

The decline in imports of 350,000 bpd (2.45 mb) was related to hurricane Abbey in the Gulf of Mexico. Ships coming into the Gulf slowed until the storm changed direction and headed eastward. No tanker driver wants to head into a hurricane with a ship loaded with crude oil.

There was also a decline in U.S. production of 150,000 bpd (1.05 mb) directly related to the storm. However, the real impact to inventory levels will be seen in the EIA report this week. The timing of the inventory report caught only the initial slowdown in production as platforms were closed in the Gulf. We should see another decline in production in this week's report and then a sharp rebound the following week.

Refinery utilization declined slightly from the YTD high of 92.6% the prior week to 92.0%, also a direct result of the storm. Refinery demand is currently running at 316,000 bpd more than the same period in 2011. That is a good sign that overall oil demand is increasing.

Inventory Snapshot

Gasoline prices continued to decline with the U.S. average at $3.36 per gallon and 22-cents below the same period in 2011. This is the 13th consecutive week that gasoline prices have declined. Diesel prices declined for the 12th consecutive week to $3.71 per gallon. Prices for both fuels are likely to end that streak of declines after oil prices rallied sharply last week.

Oil inventories at Cushing Oklahoma rose by 200,000 barrels to 47.6 million and only 200,000 barrels below the recent record. The Seaway Pipeline has been open for a month and there has been no material decline in oil at storage at Cushing. The 150,000 bpd pipeline to the Gulf refineries probably will not be a material impact on Cushing inventories until it is upgraded to 450,000 bpd in early 2013. Production from the various shale fields has increased to the point where it has overwhelmed the outflow capability from Cushing. Producers that had been using alternate shipping methods like rail cars from the Bakken may have taken advantage of the Seaway opening to route current production back to Cushing. With inventories now rising again that option is no longer available and rail traffic will increase for the rest of the year.

EIA Crude Oil Inventory Chart

EIA Gasoline Inventory Chart

EIA Distillate Inventory Chart

While oil inventories are well above their five year range and gasoline right at the bottom of the range the distillate inventories continue to decline and have reached lows not seen since June 2008. Driving our distillate inventories lower are exports to other countries. April, the latest month where complete data is available, set a record for net distillate exports. We exported 981,000 bpd in April and the highest amount since U.S. trade data has been recorded. The YTD average has been 947,000 bpd and a +29% increase (+215,000) over the same period in 2011.

The majority of our distillate exports go to Central and South America and Mexico. Stronger economies in Latin America are driving the demand for distillates which includes diesel and jet fuel. More than 50% of our exports went to Latin America. If the economy in Europe was stronger our export imbalance would be even higher. Exports to Western Europe declined by 19% in April.

Distillate demand in the U.S. for 2012 has been -112,000 bpd lower than the same period in 2011 and clearly shows the decline in U.S. economic activity.

Crude prices are set to fall again next week after China's premier said on Sunday the country faced "huge pressures" to slow further despite stimulus measures. The official Xinhua News Agency paraphrased Jiabao saying, "The economy is running at a generally stable pace, but there is still huge pressure for it to go downward." China unexpectedly cut rates last week for the second time in the last two months and cut banking reserve rate again for the third cut since November. The vice premier said on Friday that China would be "lucky" if it hit its annual export growth target of 10%. China saw exports grow by more than 20% in 2011. That means export growth is going to decline by more than half in 2012 even if they hit that 10% growth target.

WTI Crude Oil Chart

Iran is doing its best to agitate the region and pump up prices but so far the headlines have been ineffective in pushing prices higher. They held missile tests last week designed to show what would happen if they were attacked by the U.S. or Israel. The parliament announced a bill blocking the Strait of Hormuz but it was mostly a headline grab and did not have a real chance of passage. An Iranian general disclosed a plan to attack 43 U.S. installations in the Middle East in the early minutes of any conflict with Iran. On Monday Iran is going to begin air defense drills for "defending the Islamic Republic or Iran's vital national interests."

On Sunday Iran said it had signed an agreement that allows a consortium of private firms to export up to 20% of the country's oil production. Reportedly the consortium has already signed deals with European refiners to purchase the oil. If this report is accurate you can bet there will be another round of sanctions specifically worded to cover private sales.

The biggest impact on crude prices is the global economy and Europe is the weak link. The economic slowdown in Europe has impact exports from China and the U.S. and is dragging the global economy back towards recession. Expect further problems from Europe to continue weakening crude problems in the weeks ahead unless the Iran embargo turns violent.

Jim Brown

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