Surprise, Surprise!

Jim Brown
 
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The ECB surprised everyone with an actual announcement of a potential bond buying program. I say potential because the program is conditional and it may be 2013 before any funds are actually spent.

The ECB announcement surprised everyone because most analysts and traders thought the ECB would wait until after the Sept 12th German vote on the constitutionality of the ESM before announcing any firm plans. The surprise caused a major short squeeze and the rest is history.

Crude prices rallied to $97.71 for WTI before collapsing -$3 to trade at $94.55 Thursday evening. The ECB plan is not a true QE program so there is zero impact to cash reserves in the system. Secondly, it will probably be 2013 before any bonds are actually bought as a result of the conditions in the plan.

Crude spiked on the ECB announcement and also on the sharp drop in the EIA inventory report. Crude inventories declined by -7.4 million barrels as a result of Hurricane Isaac. Imports fell by 1.45 mbpd and production by -750,000 bpd. If the refiners in the Gulf area had been operating for the full week the declines would have been worse. Refinery utilization declined from 91.2% to 86.1% as a result of slowdowns or shutdowns ahead of Isaac. Power problems kept several offline for a couple days.

Inventory Snapshot

The inventory at Cushing rose by nearly 2.0 million barrels as a result of pipeline shutdowns around the Gulf.

Even with the sharp decline in supplies the crude inventories are still +1% above the five year average range. We should see another drop in inventories for this week and then a surge in the following week as tanker traffic catches up and production facilities and pipelines in the Gulf return to full operation.

Crude Oil Inventory Chart

Gasoline inventories declined -2.3 million barrels as a result of the refinery closures and slowdowns. We should see another decline in gasoline for this week and then a surge as refiners race to catch back up with their final runs of summer blended fuels before starting the switch over to winter blends.

Gasoline Inventory Chart

Distillate inventories (jet fuel, diesel and heating oil) rose by 1.0 million barrels as flight cancellations and transportation halts temporarily lowered demand. Distillates have been moving higher for the last several weeks but as you can see on the chart below the average range begins to decline after Labor Day.

Distillate Inventory Chart

The restart of Gulf production is being slowed by the appearance of a new weather system just off the coast of Louisiana and right in the middle of the oil patch. The system has a 30% chance of turning into a tropical storm. However, current thunderstorms, wind and rain as a result of the storm system are delaying the repopulation of the production facilities in the Gulf.

The other two hurricanes are moving northeast and will not make landfall in the USA. Hurricane Leslie as winds of 75 mph and Hurricane Michael has winds of 110 mph.

Atlantic Storm Tracking

The price of crude and gasoline may continue to be volatile for the next week on falling demand, uncertainty about the production restart in the Gulf and expectations for the Fed to announce a new QE program next Thursday. Analysts are mixed on whether Bernanke will announce a new QE program to drive job growth with the equity markets breaking out to multi-year highs. The determining factor may be the Nonfarm Payrolls for August to be announced Friday morning. A strong number would make it less likely for a QE program and a weak number would almost guarantee a new program.

Bernanke warned in his speech last week that unemployment was a "grave concern" and the Fed would continue to take action to improve hiring. Even if the economy produced 200,000 jobs in August the unemployment rate would remain well over 8% and the Fed wants it significantly lower.

The next week could be volatile in both the equity markets and the commodity markets. Keep your seatbelts fastened.

Jim Brown

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