Still No Weakness

Jim Brown
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WTI crude prices continue to hold at five week highs despite record U.S. production. Worries over events in the Middle East and the falling dollar helped provide support.

U.S. crude oil inventories rose +200,000 barrels to a new 22 year high at 395.5 million barrels. This was well below the expected gain of +1.7 million barrels. Refinery utilization surged from 84.4% to 87% as spring maintenance ends and summer gasoline production accelerates.

Refinery demand for crude shot up by +470,000 bpd and imports declined by -560,000 bpd. The combination of events helped support oil prices. Overall products supplied to the market rose to 19.1 mbpd.

U.S. production rose to a new 17 year high at 7.37 mbpd. Rising U.S. production depressed Brent prices but that will turnaround when a large portion of North Sea production goes offline for maintenance in the weeks ahead. The EIA is only predicting U.S. production to rise to 7.42 mbpd in 2013 but it has already risen from 6.99 mbpd at the beginning of the year or +380,000 bpd. Adding another 50,000 bpd by year end sure seems light to me.

Gasoline inventories fell by -900,000 barrels and about half of the prior week's decline. With the increase in refinery utilization these numbers will rise soon. The switch to summer fuel blends is over and the refiners should be building gasoline inventories at a faster rate. However, production declined -113,000 bpd last week.

Distillate inventories rose by +1.8 million barrels as production rose by +232,000 bpd. Demand was flat. The rise in inventories would have been larger but imports declined by -42,000 bpd.

Green squares are multiyear highs. Yellow is multiyear low. Orange is multi month high.

Inventory Snapshot

Oil Inventory Chart

Gasoline Inventory Chart

Distillate Inventory Chart

China reported that exports surged +14.7% in April and imports rose +16.8%. The trade surplus was higher than projected at $18.2 billion. However, Bank of America and Mizuho Securities said the numbers were bogus and had been inflated by falsified reports. They claimed shipments to China's two biggest markets, the U.S. and Europe, fell suggesting there was no way exports could have risen. Economic numbers out of China should always be doubted.

The news from China and some positive news from Germany forced the dollar lower and helped support prices for oil and precious metals.

Gold prices rallied +21 to resistance at $1471 and are very close to a breakout if the higher lows are to be believed. Gold purchases around the world are soaring. Imports into China more than doubled to an all time high in March at 223.52 metric tons. China's gold usage rose +26% in Q1. India's purchases for May will exceed 100 metric tons for the second consecutive month.

U.S. Dollar Index Chart

Gold Chart

Continental Resources (CLR) reported earnings after the bell of $1.17 and beat estimates by +4 cents. Revenues rose a whopping +79.8% to $710.2 million but still missed the estimates of $772.34 million. When you can increase revenues by +79% and still miss estimates there is something wrong with the way analysts are producing those estimates. To be fair the price they received for oil was $89.99 per barrel and $4.99 for gas. They lost -$1.24 per barrel due to their hedging program but gained +0.14 on gas sales due to hedging. Getting $4.99 for gas appears to be a successful hedge. Production cost per Boe was $5.70. More than 80% of their Bakken production is transported by rail to markets on the coasts.

The company produced a record of 121,500 Boe/pd in Q1, up +14% sequentially from Q4 and +42% from the year ago quarter. More than 71% of production was crude oil. CLR said they completed three more Lower Three Forks wells and they are producing in-line with similar Middle Bakken and Upper Three Forks wells. If this trend continues it will expand reserves and ultimate production for the Bakken leases. The Bakken is layered with producing zones and once a company like Continental can figure out how to produce each zone the overall reserve estimates will increase. CLR is working on a 22 well program to prove out the Lower Three Forks zone. They have completed six LTF wells and those are averaging 1,170 Boe/pd at 81% oil.

The company completed 66 net, 162 gross, wells in Q1. There were 21 wells completed in Q1 that were drilled in Q4. They currently have a backlog of 80 drilled but not completed wells.

CLR is off its 2013 highs because of worries over a divorce battle between CEO and Founder Harold Hamm and his wife. Hamm is the largest stockholder by far with a $6 billion stake and the contentious divorce has attracted a lot of attention. The company has said the divorce will have no impact on his ownership position but some investors elected to exit rather than risk a messy settlement.

CLR Chart

Anadarko Petroleum (APC) reported earnings of $1.08 compared to estimates of 94 cents. Q1 production was higher than expected thanks to a +9% increase at Wattenberg and 5% increase from East Texas. However, Anadarko said production in Q2 would decline by -6% due to some temporary shut-ins in the Eagle Ford, rig downtime in the Gulf and some issues with production overseas. Despite the expected decline the company raised its full year production estimates. Analysts are not concerned since Anadarko typically under promises and over delivers. In 2012 the company forecast production increase of 3% to 5% but then reported a +7.6% increase for the year. Revenue rose from $3.4 billion to $3.9 billion thanks to a +40.8% increase in gas production and +5.9% increase in oil production. Overall volume rose +10.9% to 793,000 Boe/pd. Liquids rose +14.6% to 345,000 Boe/pd. Realized prices declined -7.3 to $102.97 per barrel.

Anadarko Chart

EOG was the big energy winner after reporting earnings of $1.80 compared to estimates of $1.13. That is correct, it is not a typo. Revenue rose +19.6% to $3.356 billion and easily beat estimates by +10%. Production volumes rose +4.6% to 475,600 Boe/pd. Production in Q2 could climb to 506.3 Mboe/pd. Crude oil and condensate was 187,300 bpd a +33% increase. The big gains came from the Permian Basin and Eagle Ford. NGL volumes increased +16.4% to 59,500 bpd. Natural gas production declined -11.2% to 1,373 MMcf/d. The average price received for liquids was $105.61 per barrel. NGL prices declined -25.4% to $31.78 per barrel.

EOG Chart

Natural Gas

Gas prices have finally started to decline. After an extra month of winter spring has finally arrived. Gas futures are finally back under $4 and a couple weeks of rising injections into storage and we could see prices back closer to $3.50.

Natural Gas Futures.


Conditions overseas are deteriorating. Egypt is declining into a state of civil war with rampant gun smuggling to arm the citizens. Backroom machine shops are making rifles as fast as possible. Indirect investment into Egypt has fallen to only 15%. Outside corporations are shuttering locations and extracting workers.

Syria is on the verge of a major blowup. Israel has bombed them twice in the last several days and the Syrian government has promised reprisals. Since Syria has no real capability to attack Israel there are worries that Iran will do it through their proxy Hezbollah using weapons transited through Syria.

Russia and Iran are currently landing several cargo planes of weapons every day to supply the Syrian government. Fighting is moving into Jordan and the entire region could be in a war in the weeks to come. The red line president Obama drew over the use of chemical weapons was drawn with disappearing ink. The U.S. does not want to get involved in what is turning out to be a regional conflict with Russia backing Iran and Syria.

This conflict is taking the focus off of Iran and the nuclear issue. The talks scheduled for May 15th with the IAEA will likely fail again but when Syria is occupying the headlines Iran will get another couple of months to work on their enrichment before another meeting is scheduled. This is the Iranian "rope a dope" maneuver they have perfected over the last decade. Act like you want to talk and reach a solution but then never actually talk about anything important.

Iraq is imploding. Bombings are accelerating and U.S. oil companies have all but quit working on Iraqi oil fields. China is taking over the major fields because worker lives are less important to them. This will be a challenge in the years ahead when China has first rights to Iraqi oil but that will be years into the future.

All of these problems may not seem critical independently but when taken as a group there are some serious challenges developing. If the entire region falls into war it could easily spread to oil producing nations. Iran would like nothing better than to cause its neighbors grief.

Watch the headlines carefully in the context of the wider scale.


The market rally has entered a new phase where gains are accelerating and the indexes are going vertical. This will eventually end badly but for now the acceleration is sucking money in from the sideline at a rapidly increasing rate. Professional analysts are dumbfounded at the market disconnect from the fundamentals.

Investors should remain long BUT stay very cautious. We are in a period of irrational exuberance and when it finally ends the markets typically drop faster than they rose.

Jim Brown

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