Spring Inventory Build Begins

Jim Brown
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The surge in crude inventories has begun as refinery utilization declined sharply. We are only six million barrels below a 22 year high in crude inventories.

The EIA said crude inventories swelled by 3.8 million barrels last week to 381.4 million. The 22 year high is 387.3 million set back in June 2012. Without a dramatic change in seasonal patterns we should pass that high-water mark in the next several weeks and be well over that level when the seasonal peak comes in early June. Crude inventories are already 10.3% over year ago levels.

Refinery utilization declined a whopping -3% to 82.2% as spring maintenance gets underway. This reduced the refinery demand for oil by -480,000 bpd or 3.2 million barrels for the week. That is a major decline. At the same time gasoline production fell by -605,000 bpd or 4.2 million barrels for the week. That is also a monster drop. Gasoline demand fell by -233,000 bpd.

Distillate inventories fell by -3.8 million barrels with production declining by -228,000 bpd. Distillate inventories are -13.7% below year ago levels and further large declines are not helping the situation.

Crude oil imports fell by -700,000 bpd to 7.3 mbpd. That is a -4.9 million barrel decline for the week. You would have thought with that large of a drop there would not have been such a large increase in crude levels even with refineries slowing dramatically. This is an indication of the impact of the winter storms in the Midwest and Northeast. Thousands of flights have been cancelled and trucks are not moving freight. This is that time of year where the weather plays havoc with normal activities and that is why the refiners start taking units offline for maintenance in this low demand period.

Nothing should be deduced from this inventory report. The sporadic nature of the numbers in February and March tend to produce volatility in prices but the key is to anticipate the ramp up to the summer driving season.

I added the rig counts to the weekly inventory snapshot graphic.

Inventory Snapshot

Crude Oil Inventory Chart

Gasoline Inventory Chart

Distillate Inventory Chart

Hugo Chavez Rein Over

Venezuelan president Hugo Chavez died on Tuesday afternoon from complications of cancer. Actually he is believed to have died days or even weeks earlier and Venezuelan authorities were trying to decide how to spin the event. Chavez was a lightning rod. He claimed Syrian president Bashar al-Assad had the same political vision as Venezuelan revolutionaries. Saddam Hussein was a brother. Col Gaddafi was a "brilliant leader" and a brother. Carlos the Jackal was a "good friend." Zimbabwe's dictator Robert Mugabe was a "freedom fighter." Belarusian dictator Alexander Lukashenko presided over "a model of a social state." Iran's president was a "comrade in arms" against the USA. You get the picture.

During his term in office he pillaged the energy sector in Venezuela and used the proceeds of their oil sales as handouts to the people in various social programs. The result was a lack of capital to develop existing fields or even to keep existing equipment working.

Venezuela has the second largest oil reserves in OPEC at 296.5 billion barrels according to BP Statistical World Review. However, because of Chavez stripping the cash out of PDVSA the production declined -13% over the last decade. The output at new Orinco fields was supposed to reach 195,000 bpd by the end of 2012 but is currently only 6,000 bpd because of capex cutbacks. That is costing PDVSA and Venezuela $19 million a day.

Total output in Venezuela declined from 3.5 mbpd to 2.3 mbpd in 2012. During his term in office Chavez nationalized oil installations owned by Conoco, Exxon and others. He raised taxes to as high as 95% of production.

The Orinco oil belt covers 55,314 square kilometers and contains 257 billion barrels of heavy oil reserves. The U.S. EIA claims recoverable reserves in the 513 billion range. Production could not be increased under Chavez because PDVSA had no money to build pipelines to get the oil to market. Until the country quits taking the money out of PDVSA the only option is to truck the oil hundreds of kilometers to coastal refineries.

PDVSA said last April it would invest $10.5 billion in pipelines and terminals between 2012-2018 but so far nothing has been done due to lack of funds.

The government of Venezuela has a golden opportunity here to rebuild their economy with a massive expansion of the oil infrastructure and development of additional wells. If the new president will take his foot off the throat of PDVSA and let the golden goose lay golden eggs again the entire country would benefit. However, the vice president, Nicolas Maduro, the recommended choice to take over according to Chavez, may turn out to be more radical than Chavez. The country is facing a new election to replace Chavez and Maduro has already begun campaigning and promising that not one program will be changed. These are social programs giving food, jobs, higher wages, etc to the masses of low level workers. Give voters stuff and they will vote for you. Some believe he could be more radical because he will have to prove himself worthy of the job. That means more giveaways.

He could be the hero by inviting the international oil companies back in and letting them spend their money to develop the fields and build the pipelines. Unfortunately that is not likely to happen in the near future. Venezuela may have to go bankrupt before the citizens throw the bums out and elect a reformer that will resurrect the golden goose of oil production.

Never Enough Money

Brazilian company Petrobras (PBR) discovered more than 200 billion barrels of oil in the deepwater 200 miles offshore Brazil but they have been unable to turn that into cash. They are working hard on that project but drilling under 6,500 feet of water and another 10,000 feet of rock and salt is an expensive proposition.

The company announced it would quit leasing new rigs in an effort to control costs. Petrobras already has 40 active rigs and was scheduled to add one in 2013 and another in 2014. It had also previously announced the addition of 28 new rigs being built for PBR between 2015-2020 from Sete Brasil Participacoes. The company announced a $236 billion capex program from 2011 through 2016 as it attempts to produce that deepwater oil. In 2012 profits fell to the lowest level since 2004 as a result of the drilling expenses.

The problem is that Petrobras can't get the oil out of the ground fast enough. There are no pipelines from 200 miles offshore. The oil has to be stored in moored tankers until offloaded into tankers to take it to shore. This is slow, expensive and time consuming. The wells are expensive and the Brazilian government is not friendly to drillers. The oil will be produced but it may take a long time and not in the volumes initially expected.

Lastly Petrobras is a state owned company. The government concocted a scheme where the company must buy the oil to be produced in advance. Like government everywhere they are all about extracting cash out of their golden geese and then forgetting to support them when times are tough. In Brazil the government sets the prices for gasoline and diesel. They don?t want to depress the economy so they have kept fuel prices low and force Petrobras to operate at a loss.

Petrobras stock jumped 15% on Wednesday after the government allowed a 5% increase in diesel prices. Petrobras shares had been heavily shorted and were trading at a eight-year low prior to the announcement.

If the government would get out of the way and let the private sector develop the oil reserves they would be much farther along by now.

Petrobras Chart

Brent Crude Pipeline Problem

Brent crude prices rebounded $2 on Tuesday because of a shutdown in a North Sea pipeline system. The Brent pipeline has been shutdown since March 2nd after a leak was discovered on the Cormorant Alpha platform. Production from the 27 North Sea fields supplying that pipeline was halted until the leak could be fixed. The pipeline carries 90,000 bpd of oil. That is roughly 10% of the U.K. production.

The North Sea Buzzard field saw output increasing again after planned maintenance was completed ahead of schedule. The 200,000 bpd field was scheduled to be offline for four days.

In Nigeria thieves cut into a main supply pipeline and forced Shell to declare force majeure on deliveries of Bonny Light crude. The shutdown halted roughly 150,000 bpd of production in late February due to pipeline cuts.

Exxon declared force majeure on shipments of Qua Iboe crude because of repairs to the pipeline system.

The thieves find a bunch of tanker trucks and converge on a point in the pipeline where they cut/drill holes and fill up the trucks. Theft is so rampant the pipelines are shutdown numerous times a year for repair.

Routinely thieves cut into the wrong pipeline and hit natural gas instead and that results in major explosions and numerous deaths as those lined up to grab a bucket of oil are engulfed in the flames.

Nigeria has the most shutdowns of existing production of any country in the world.

Equity Markets

The Dow closed at a new record today with a +42 point gain but the Nasdaq ended with a loss. The S&P managed to inch higher with a +1.67 gain. The failure for all markets to push higher suggests the bullish sentiment may be fading. March is quite often a rocky month for the markets so it will be up to the Fed to keep pouring in the QE purchases to maintain momentum. The Fed is purchasing $185 million an hour in treasuries and MBS whenever the market is open.

WTI crude prices declined to support at $90 and have held there for four days. The dollar closed at a new six month high so commodities got no help from the currency sector.

The ADP Payroll report showed an expected gain of +198,000 jobs in February. The estimate was for a gain of +175,000. However, the ADP report does not always correlate with the Nonfarm Payrolls due out on Friday.

The Fed Beige Book was lackluster with claims from the 12 Fed districts that the economy was growing either modestly or moderately. One interesting point on employment. The Richmond Fed said employment was under stress due to concerns over Obamacare and the impact on small businesses from the increased costs. The Fed said businesses were either scaling back on hiring or planning layoffs as a result of Obamacare. Last month the Chicago Fed said the same thing in the Beige Book survey. We are still a ways off from implementation of the Affordable Care Act but the impacts are starting to appear everywhere.