BP, Iran and Inventory Builds

Jim Brown
 
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WTI crude declined from $98.60 to $92.89 in six days. There were various factors to blame but it was really just profit taking from the December to January rally.

The soaring dollar gets most of the blame with the dollar index spiking to a new six month high. The dollar strength crushed commodities of all types and oil was simply collateral damage. Gold declined to $1575 and silver to $28.35.

The EIA inventories on Thursday did not help with the addition of 4.1 million barrels of crude to push inventories to 376.4 million barrels. That was the fifth consecutive week of gains. That is slightly over 10 million barrels short of a new 22 year high of 387.3 million set last June. Crude production rose to 7.12 million barrels and the most since July 1992. Inventories are now 10.47% over year ago levels.

Gasoline inventories declined by -2.9 million barrels. This was aided by an uptick in demand of +33,000 bpd and a drop in imports of -106,000 bpd. Retail gasoline prices have risen for 36 consecutive days and stood at $3.78 on Friday. We are still two months from the normal seasonal high for prices at the end of April.

Distillate inventories fell by -2.3 million barrels after a -3.7 million barrel decline the prior week. This was the fourth consecutive week of declines. The decline would have been worse but distillate demand fell by -134,000 bpd for a drop in demand of -938,000 barrels for the week. In addition to that distillate imports rose by +151,000 bpd or 1.057 million barrels. That swing in demand and imports added 2.0 million barrels but production fell by -85,000 bpd or -595,000 barrels total.

WTI futures expired on Wednesday but it did not appear to add appreciably to the inventories at Cushing. Inventories rose only slightly from 50.2 million to 50.7 million barrels.

US Production has risen to a new 20-year high each of the last two weeks.

Inventory Snapshot

Oil Inventory Chart

Gasoline Inventory Chart

Distillate Inventory Chart

Gasoline prices have been rising since Hess (HES) said it planned to close the 70,000 bpd Port Reading refinery at the end of February. On the Gulf Coast the Motiva Norco, Louisiana and Port Arthur, Texas refineries are down for maintenance in February. In the Northeast the crude units were reportedly down at Monroe Energy's 185,000 bpd Trainer refinery and at Philadelphia Energy Solutions 335,000 bpd Philadelphia refinery. Refinery outages in Venezuela have slowed the importation of gasoline as well.

BP's Whiting Indiana refinery went down in November for a $4 billion upgrade and should have been back up by now but BP is now saying it will be offline until July or later. BP is upgrading the plant to refine the cheap Canadian oil sands crude. It currently has the capacity to process 80,000 bpd of Canadian crude and that will increase to 350,000 bpd while the total capacity will remain 405,000 bpd. The loss of that much refining capacity is producing a shortage of gasoline.

Trade press estimates that 1.7 mbpd of refinery capacity was offline for the week ended Feb-15th.

Gasoline Futures Chart

Iran setting Up for a Battle this Week

Iran stoked the uranium fires just a couple days before the P5+1 talks are to begin on Tuesday. Iran said it had located significant new reserves of raw uranium and identified 16 more sites for nuclear power stations. Obviously the new uranium reserves can't be verified and the claims are highly skeptical since Iran has been looking for its own uranium for more than 20 years with no luck.

This is likely a ploy to give it a stronger hand at the negotiating table when the talks begin on Tuesday. Iran made similar nuclear announcements before the three failed talks in 2012. They always have some big breakthrough or show and tell the week before the talks start. Finding 16 additional sites for nuclear power plants is supposed to strengthen their claims they only want the nuclear program to produce energy.

The problem with that claim is that you only need a 5% enrichment level to fuel a nuclear plant. Iran has been on a crash program for the last two years to enrich to a 20% level which is only a short step away from weapons grade uranium. They can stockpile 20% enriched until everything else is in place to make a bomb and then within a matter of weeks improve that to true weapons grade uranium. Recently Iran announced they were installing 10,000 newer faster centrifuges capable of enriching faster and to a higher density. These are not needed for enriching to feed nuclear power plants. According to the IAEA this is further confirmation that Iran is trying to create a weapon.

The P5+1 nations are prepared to remove the last sanction they applied just last month that restricts gold and metals trading if Iran will agree to give up enrichment over 5% and shutdown their top secret Fordo underground facility. Iran has already said they will not give up any rights until after the sanctions are removed. Iran said "the P5+1 nations must remove the sanctions and rebuild their trust with Iran before Iran will agree to any proposals." That is not likely to happen.

Judgment Day for BP

Share of BP rose +2.5% on Friday after news leaked the company and the government were considering a $16 billion settlement of the government damages portion of the Deepwater Horizon disaster. The trial is scheduled to start on Monday. The Justice Department, Alabama, Florida, Louisiana, Mississippi and Texas had reportedly prepared an offer to resolve the two biggest issues to be covered in the liability trial. One issue is the fine for violating the Clean Water Act by spilling more than four million barrels of oil in the Gulf. The second issue is the penalty under a different statute for environmental damage done to beaches, marshes, wildlife and fisheries. The Wall Street Journal said the $16 billion settlement would cover both of those issues.

One of the hang ups to the deal was that it did not cover the economic damages claimed by the states. Those include lost taxes, royalties, tourism income, lost wages, unemployment compensation for laid off workers, damages to parks, roads, harbors, etc. Those economic damages could also run in the tens of billions. BP claims they are being grossly overstated.

BP wants less fines and more payments through environmental damage penalties because penalties can be written off as tax deductions while fines cannot be deducted. However, the states have more flexibility in spending money derived from fines. So far BP has already agreed to pay $30 billion in fines, settlement payments and cleanup costs.

If BP goes to trial next week and is found to have acted with gross negligence then the fines and penalties for the water quality issues can increase by $17.5 billion. This is a huge incentive for BP to settle out of court. That particular fine would not be deductible.

Jim Brown

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