Hurricane Decline

Jim Brown
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Crude oil inventories declined sharply for the second week as the impact from tropical storm Debby is felt in the supply chain.

I wrote last week that we would see another sharp decline in inventories this week as the real impact from the Gulf shutdown was felt farther up the supply chain. That decline came to pass with a -4.7 million barrel drop and the second week with more than a 4.0 million barrel decline. The impact from Debby should now be over and next week conditions should return to normal. Unfortunately normal in this economy still needs to be defined.

Refinery utilization shot up to 92.7% and the high for the year and that resulted in a sharp increase in gasoline and distillate inventories. This is also part of the restocking push after the increase in consumption over the holiday week. Refineries increased production to compensate for the blip in demand.

Crude demand by refineries rose by +143,000 bpd while crude imports declined by -148,000 bpd. U.S. production rose sharply by +155,000 bpd as Gulf rigs went back to work. Crude inventories have declined over 9.0 million barrels over the last three weeks but they are still 6.4% higher than the same period in 2011.

The biggest shock to the system was a -645,000 bpd decline in distillate demand. Imports and exports were basically flat with the prior week so there was a big abnormality in the reporting system somewhere. That equates to a change in demand of 4.5 million barrels out of weekly consumption of 27.0 million. That is a monster blip in the data that could be corrected next week.

Inventory Snapshot

Cushing inventories fell by -800,000 barrels for no apparent reason. I suspect it was a slowdown in incoming volumes due to holiday schedules in the oil patch but that is just speculation on my part. Normally producers don't stop for anything but unplanned maintenance and disasters and a holiday is just another workday. One analyst suggested more oil could be moving through the Seaway pipeline away from Cushing but I don't think any of the additional volume upgrades have been completed yet.

EIA Crude Oil Inventory Chart

EIA Gasoline Inventory Chart

EIA Distillate Inventory Chart

Crude oil prices rose unexpectedly after 2:PM to close near the highs of the day with a gain of more than $2. The FOMC minutes disappointed traders with little or no mention of an imminent QE3 program. The dollar spiked on the news and pushed oil prices lower but the dip was quickly bought and crude returned to the $86 level.

In theory the lack of a QE program supports the dollar and weakens oil prices. The market did not prove out that theory today.

WTI Crude Oil Chart

I am also surprised to see oil prices rising after the disaster at PFGBest. The futures company confessed to hiding more than $200 million in missing customer funds on Tuesday and filed Chapter 7 bankruptcy today. The company has many hundreds of millions of dollars in customer accounts other than the missing $200 million. The CFTC has put PFG under a liquidation only order and traders cannot initiate new positions. They can only close existing positions. That could involve closing shorts as well as longs.

The big problem is the money. Investors have been notified that their funds are frozen and cannot be withdrawn or transferred to other brokers. They are locked out of the market for what could be many months. Typically regulators will attempt to liquidate all positions and then ascertain the total amount of money they have and the total amount missing. They will subtract the missing amount from the existing funds and clients will receive a prorated return of their remaining funds.

If you had $100,000 in a PFG account and regulators determined 20% of all customer funds were missing then you get a check for $80,000 even though your funds may have been segregated correctly. Everyone shares the pain since all funds are comingled by the broker.

This could be a wet blanket on the commodities sector for months to come. It is especially damaging since it came so soon after the MF Global disaster. Many of these traders had just moved what was left of their accounts at MF Global to PFG as their new broker. Now they will get a new haircut on their PFG account. Several managing brokers have already said their customers are throwing in the towel and will no longer trade futures.

OPEC revised its demand growth projections for 2013 slightly lower to +820,000 bpd. They kept 2012 estimates for demand growth of +900,000 bpd. The EIA cut its 2013 demand forecast by 360,000 bpd to +730,000 bpd. Citigroup puts 2013 demand growth at +900,000 bpd, Barclays at 1.16 mbpd and JBC Energy at 1.1 mbpd.

OPEC said it was basing its lowered forecast on slowing global GDP and concerns that Greece will leave the euro and cause significant financial damage to the eurozone. OPEC expects global supply to rise by +700,000 bpd in 2012 and +900,000 bpd in 2013. Under their scenario the excess supply cushion will remain in the 1.5-2.0 mbpd range through 2013. That is just enough to keep prices moving higher but not narrow enough to push prices to unrealistic levels. I suspect this is expectation management by OPEC. Even if there was going to be a 5.0 mbpd excess I doubt they would disclose it and allow prices to collapse. Better to keep the production forecasts close to the demand forecasts and keep prices in their comfort zone around $100-$110 for Brent.

If the global economy begins to improve in early 2013 you can expect these forecasts to increase significantly. OPEC and the EIA update their forecasts monthly so we are never more than a few weeks away from some newly revised forecast. I consider the OPEC updates a form of advertising by OPEC. We are in control, we are watching out for your fuel prices. That just happens to be the same fuel price that keeps those OPEC countries rolling in the dough.

Jim Brown

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