Summer Driving Over

Jim Brown
 
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Demand fell last week and fuel inventories rose as the summer driving season came to a close.

Gasoline demand fell -489,000 mbpd to 8.61 mbpd and the lowest level since April 26th as the summer driving season ended on Labor Day. Distillate demand fell -281,000 bpd to 3.52 mbpd and the lowest level since March 8th.

Gasoline inventories rose for the first time in five weeks with a +1.7 million barrel gain. Distillate inventories rose +2.6 million barrels and the biggest gain since July 5th.

Crude oil inventories were flat at 360.0 million barrels despite a decline in imports of -238,000 bpd. The inventory level remained solid because of a jump of +124,000 bpd in U.S. production to a new 18 year high of 7.75 mbpd.

Cushing inventories fell for the eighth consecutive week with a drop to 34.1 million barrels. That is the lowest level since February 24th. Cushing inventories are rapidly approaching the 28.273 mb level that would be a four year low. The decline from the 51.862 mb historic peak on January 11th has been dramatic. This is a factor of new takeaway capacity and producers shipping oil by rail directly to refiners rather than pipeline it to Cushing.

Refinery utilization rose unexpectedly from 91.7% to 92.5% and that is a two-month high. It is very unusual for refineries to be running this fast after the summer driving season. We should be seeing utilization decline as the maintenance season begins rather than increases. I am guessing some refiners are trying to burn through existing crude supplies and increase fuel inventories before shutting down for maintenance but that is only a guess.

With demand falling rapidly and the approaching shift to winter fuel blends we should see refinery utilization drop into the low 80% range over the coming weeks.

Crude inventories will begin to build until the maintenance cycle is over then deplete rapidly as refiners try to reduce inventory before the December 31st tax deadline. Refiners are taxed on the amount of oil in inventory on December 31st so inventories normally decline sharply beginning in November.

(Inventory Snapshot guide: Green squares are multiyear highs. Yellow is multiyear low. Orange is multi month high. Pink is multi-week highs. Blue is multi-week low. Crude oil at 397.6 mb on May 24th was the highest since 1931. Cushing inventories at 51.86 MB in January was a historic high.)

Inventory Snapshot

The temporary calming of the Syrian tensions knocked -$4 off WTI prices since the $112 high on Friday. This should be only a temporary decline although once investors become accustomed to the rise and fall of tensions in the area the spikes should be subdued.

This is a temporary calming because the Russian proposal to transfer Syrian chemical weapons will not work. It was a bid to buy Syria time by Russia. Putin correctly believed if he could stall the U.S. attack the potential for that attack would decline. The resolution will be DOA in the House if by some chance the Senate actually passes it and that is seriously in doubt.

Transferring Syria's chemical weapons to international control would take months to even get an inventory of quantities and locations and nobody seriously believes Assad would provide an accurate accounting anyway. If he believed he was going to be forced to give them up for free the odds would greatly increase for donations to Hezbollah for use against Jordan and Israel. There are analysts who believe Iran may even take some off his hands for future use.

The U.S. believes it would take a 75,000 man force to secure and protect chemical weapons caches because they have been dispersed all over the country. Collecting them into centralized locations for destruction would be practically impossible because of the civil war in progress. The rebels would love to capture some and use them against Assad.

Over the next 2-3 weeks there will be several attempts to resolve the situation diplomatically but I predict they will all fail. However, the president has been given a "get out of the box free card" and I would expect him to delay any resumption of the attack process as long as possible and permanently if he can arrange it. The massive amount of citizen objection to an attack has given him even more reasons to change the direction of the Syrian process.

I think it would take another use of chemical weapons by Syria to rekindle the attack process. If Assad is stupid enough to do it then he deserves to be bombed.

Hurricane Watch

September has suddenly lived up to the historical standards for storm intensity. September 10th is historically the peak of hurricane season. Currently there are two named storms and two low pressure areas that could develop into storms. Gabrielle dissipated last week and nearly evaporated from the map only to be reborn this week. The storm is currently on track to pass off the coast of Rhode Island and is no threat to any U.S. oil field.

Humberto is heading westward from the Cape Verde islands and has already reached sustained winds of 85 mph and is now a category 1 hurricane. It is currently tracking northwest and should follow Gabrielle into the northern Atlantic. It is not a current threat to the Gulf of Mexico.

There is a strong low pressure area currently over the Yucatan Peninsula that will enter the southwest Gulf over the Bay of Campeche on Thursday where conditions are favorable for the storm to increase in severity enough to be named and possibly enough to become a hurricane. This storm does have the capability to become a danger to the Guld oil patch. The last two storms in this vicinity were drawn westward over Mexico because of a depression in the Baja region. There is another low pressure system approaching southern Mexico from the Pacific and this could also pull the Gulf storm over Mexico and reduce the risk.

There is another low pressure area about 600 miles east of the Leeward Islands but it only has a very small chance of becoming anything but rain because conditions are not conducive for development.


Market

The equity market continued its rally on Wednesday but the Nasdaq was pulled lower by a -$27 drop in Apple. The Dow gained +145 points to 15,326 and the S&P +5 to 1,688. The S&P has strong resistance from here to the prior high at 1,709 and the week of gains is definitely over extended.

The House was scheduled to vote on a stop-gap budget bill today but the rank-and-file republicans objected and stalled the process. The House leadership claims there is not enough time to fully debate a budget bill and planned on a 90 day extension to the continuing resolution.

What the House really wants to do is postpone the budget battle until after the debt ceiling battle that would come to a head over the next couple of weeks. They can't increase the budget until they increase the debt ceiling and republicans are dead set on getting some spending cuts as a part of the debt ceiling negotiations. It makes no sense to battle on the budget if they are planning on changing it and currently have no additional lending capability to fund it. The debt ceiling fight is going to be contentious.

The plan put forth by conservatives would be to have President Obama agree to a one-year delay in Obamacare in exchange for a rise in the debt ceiling and a plan to cancel the sequestration cuts for the next fiscal year which starts in October. The president would have higher spending limits in exchange for a temporary delay in Obamacare for individuals similar to the one-year delay in corporate enactment.

The potential for a headline war over the next couple weeks still has the capability to depress the equity markets. At this point I would doubt if there is going to be a serious decline in September but never say never.

Jim Brown

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