New High for Crude

Jim Brown
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Crude inventories reached a historic high last week at 397.6 million barrels. Fortunately the inventory build did not weigh on prices.

Crude inventories rose +3 million barrels last week to 397.6 million. That is well above the prior highs and the most since the EIA began keeping records in 1982. That is the fourth weekly record in May and the trend is not likely to change in the near future. The determining factor will be the amount of crude storage space rather than production and demand.

Top Seven Inventory Weeks

Crude inventories rose because refinery demand declined by -220,000 bpd with utilization rates slipping from 87.3% to 86.4%. However, imports declined by -313,000 bpd so there is a blip in the data somewhere that is likely a report timing issue.

Inventories at Cushing rose to 50.5 million barrels and creeping ever closer to the historic high at 51.9 million set on January 11th. The delays in expanding the takeaway capability from Cushing plus the increase in production in the Midwest is forcing the storage issue. If Cushing was to hit its theoretical limit of 61.9 million barrels the price of oil would plunge simply because there would be nowhere to deliver it. Cushing is the delivery point for WTI crude futures.

The working storage capacity of 61.9 million barrels includes a portion of capacity that must be kept open in order to move oil around and allow for input of new oil while old oil in storage is being delivered out of different tanks. The 50 million barrels in storage don't just sit there for months. Oil coming in is directed to empty tanks while oil being delivered to outgoing pipelines is flowing out from other tanks. There is also the issue of grades. Oil coming in from different fields can be a different grade in terms of sulfur content and viscosity. Various grades have to be kept separate until delivered to the pipeline system. Previously it was assumed that something in the 52 million barrels range was the operating capacity. That left ten million barrels of capacity for handling new deliveries.

In recent years various pipeline companies have added storage tanks to the Cushing complex. According to the EIA there is a total shell capacity of 74.6 million barrels but not all of that is available to be used.

The third party tank owners lease their storage capacity so it is not actually a part of the daily operating capacity for Cushing. If oil prices were to drop suddenly the speculators would buy futures contracts with the intent to take delivery, store the oil for several months and hope to sell it for more when prices rebounded. These third party tanks is where the oil would be stored.

For all practical purposes we will continue to use 52 million barrels as the point where oil prices should begin to decline due to a lack of available working storage at Cushing.

Working Capacity Storage at Cushing

Tank Capacity Explained

Gasoline inventories declined by -1.5 million barrels and the first drop in three weeks. Since refiners should be adding to gasoline supplies for the summer driving season this decline helped to offset the bearishness of the build in crude inventories. The drop was attributed to a sharp decline in imports of -388,000 bpd. Gasoline inventories are already 9.5% above year ago levels.

Distillate inventories rose by +1.9 million barrels. Inventories declined the prior week by -1.1 mb for the only decline in the last seven weeks. Distillate inventories are just slightly above year ago levels. Distillate demand has jumped for the last two weeks and suggests the economy may be starting to show signs of improvement.

Green squares are multiyear highs. Yellow is multiyear low. Orange is multi month high. Pink is multi-week highs. The number of active gas rigs at 350 is an 18 year low. Oil rigs at 1,412 is an eight-month high. Crude oil at 397.6 mb is thirty year high.

Inventory Snapshot

Crude Oil Inventory Chart

Gasoline Inventory Chart

Distillate Inventory Chart

Natural gas prices declined for the week to end under $4 after an injection of only 88 Bcf. This was lower than expected. However, expectations for above normal temperatures but not hot plus a drop in nuclear plant outages suggests injections over the next couple of weeks could rise.

Based on the latest weather forecast there is not expected to be a surge in cooling demand so power plants will be in idle mode. Fewer nuclear plants are offline for maintenance than last year and fewer than the five-year average for early June. This means secondary coal/gas fired plants will see lower demand. Nuclear outages totaled 13,600 megawatts or 16% of capacity, down from 15,700 megawatts out earlier in the week and 17,400 mw offline in the same week last year.

Higher gas prices have more than likely boosted production as producers that had curtailed production at cheaper prices took advantage of the spike to open the valves a little farther.

Natural Gas Futures Chart

Iran is about to hold elections for a new president. The current favorite blessed by the Supreme Leader is Saeed Jalili. He said in a recent speech, "The goal of Iran and its allies is to uproot capitalism, Zionism and Communism and promote the discourse of pure Islam in the world." His campaign slogan, "No compromise, no submission" refers to the nuclear talks and sanctions being levied on them from the UN and EU. He was the nuclear negotiator for Iran. Things are not looking good for a peaceful solution to the nuclear issue with Iran.

On Friday the U.S. slammed Iran with another round of sanctions as a result of the last two months of unsuccessful talks and additional bragging by Iran about its progress in uranium enrichment. The U.S. blacklisted companies in Iran's petrochemical industry. Iran has been moving to higher exports of refined products and petrochemicals since oil sales are already prohibited. This move by the U.S. is to shutdown that source of revenue, which was the largest source of funds behind oil sales. The Treasury Department blacklisted eight Iranian checmical companies wither owned or controlled by the government. The U.S. also imposed sanctions on a "food and beverage" company based in the Persian Gulf for "knowingly engaging" in a transaction for the purchase of petrochemical products from Iran. The Iranian government has been pressuring and bribing companies to handle transactions for Iran as independent third parties. The U.S. and E.U. are attempting to sanction those companies when transactions are discovered.

Also on Friday Kinder Morgan Energy Partners (KMP) said it had scrapped plans to build a $2 billion pipeline from West Texas to southern California. The pipeline went into open season in April as KMP solicited bids from refiners on oil quantities if the pipeline was built. Pipeline operators try to pre-sell the capacity on long term contracts before committing to spend the money and effort to build the lines.

KMP did not receive sufficient interest in the pipeline and cancelled the plans. The 277,000 bpd pipeline would have transported light sweet crude from Texas to southern California. Currently those Californian refiners depend on waterborne crude from Russia, Ecuador and at least a dozen other countries. You would have thought they would want to get cheap crude from Texas with the associated security risks from ocean transport.

Refiners are currently building up their rail fleets so they have the freedom to ship oil from whatever field is cheap and not be locked into a long term pipeline contract. Valero is ramping up a $190 million plan to own 12,000 rail cars by 2015. Tesoro is spending $100 million to joint venture with Savage Company to ship 120,000 bpd from the Bakken to their West Coast refineries. Shares of KMP lost $5 for the week with a big drop on Wednesday and Thursday. Apparently the news leaked before the official announcement.

What country is the largest producer of oil? If you said Saudi Arabia you would have been wrong. Russia produced 10.48 mbpd in May. That was the highest level so far this year. However, oil exports declined -6.2% to 5.26 mbpd. The decline in exports is due to higher demand in Russia and a decline in imports to the USA. Russian oil production peaked in 1987 at 11.48 mbpd and the post Soviet era production record was 10.49 mbpd in November 2012. Putin has called for production to be maintained at more than 10 mbpd.

China, with the world's second largest military budget, expanded its nuclear weapon stockpile last year. Analysts claim China now has 250 warheads. The Stockholm International Peace Research Institute said India and Pakistan also added to their arsenals. Pakistan now holds 100 to 120 weapons and India owns 90 to 110. They also said North Korea could have as many as 8 warheads but the operational status was questionable.

The Institute said the U.S. and others (Russia) were making efforts to expand their capabilities but not necessarily their total warheads. The U.S. and Russia are working on improving delivery systems under long term modernization programs.

The Institute also warned that Iran was expanding the speed and scope of its nuclear program and could have weapons at any time.

The world's total number of nuclear weapons shrank from 19,000 a year ago to 17,265 as the U.S. and Russia continued to decommission older warheads and convert the uranium to fuel for nuclear reactors. Russia still has the most at 8,500 with the U.S. in second place at 7,700. France is believed to have 300, the U.K. 225 and Israel 80. Israel has never admitted to having nuclear weapons but is widely believed to have the capability. Since 500 or so would be enough to radiate most of the world in fallout we have more than enough to kill off the human species.

President Obama gave a speech in 2009 calling for the elimination of nuclear weapons and he has been quoted several times since then as saying the U.S. should cut its weapons back to no more than 300 warheads. That makes me very nervous since the concept of Mutually Assured Destruction fails if the opposition believes they can eliminate a substantial portion of our warheads with a preemptive strike. With 300 warheads that would be possible. With 7,700 it is impossible and that remains a deterrent.

China is focusing on making their delivery systems more resistant to attack and extending the capabilities to make them harder to stop once they are launched. The Institute said there were "an extraordinary number of tests of nuclear capable delivery systems conducted in 2012." That s a good indicator these countries are racing to modernize and expand their arsenals.


The U.S. markets are showing some extreme volatility that suggests a prolonged bout of profit taking may be near.

We may be seeing some cracks in the foundation of the market and seven month rally. The Dow has not had a three-day losing streak in 2013 so we are way overdue for a decent bout of profit taking.

We are going to be heading into the summer doldrums where traders are absent from the market and spending time with their families. Even the most bullish of analysts are still predicting a weakening of the market the summer. Be patient because we will use any declines as a buying opportunity.

Jim Brown

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