Inventory Rebound

Jim Brown
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Crude inventories rebounded as expected after an abnormally large drop of -4.4 million barrels the prior week. Refinery utilization also plunged as fall maintenance begins.

Crude inventories rebounded +2.6 million barrels to 358.3 million after the -4.4 million decline last week. I theorized last week the flurry of storms in the Atlantic probably disrupted shipping patterns as tanker drivers either went into a holding pattern or steered around the storms. That would have slowed deliveries into the U.S. and reduced inventories. If that theory is correct the bounce we saw this week will probably be followed by another gain next week. Imports rose +346,000 bpd over the prior week.

Inventories at Cushing fell for the tenth consecutive week with a -700,000 barrel drop to 32.8 million and the lowest level since February 2012.

Note that crude inventories have been well outside the five year range until just the last several months.

Crude Inventory Chart

Refinery utilization fell sharply from the abnormally high 92.5% level from the prior two weeks. Utilization declined to 90.3% and will probably fall again next week. Utilization for the same week last year was only 87.4%. Refiners are taking capacity offline for maintenance and to switch from summer to winter fuel blends. Adding to that decline were upsets at Valero's Memphis and Marathon's Galveston refineries. Crude prices in the Gulf of Mexico declined by 20-75 cents on the refinery outages.

Gasoline inventories rose by a minor +217,000 barrels to 216.2 million barrels. This was an improvement over the -1.6 million barrel decline the prior week but inventories are still +10.4% over the year ago levels. Demand declined by -182,000 bpd. Gasoline inventories should continue to decline as refiners switch to winter blends. They need to drain all the summer blends out of the system before beginning full production of winter products. Note the sharp drops in the historic ranges in prior Septembers. With inventories at the high end of the range there is a lot of gasoline to sell down. Gasoline prices should reflect this in the weeks to come.

Gasoline Inventory Chart

Distillates declined by -234,000 barrels to 130.9 million. Distillate inventories probably peaked two weeks ago at 132.2 million. Consumers are starting to take deliveries of heating oil and diesel demand should increase over the next three months as products are shipped to retailers and UPS/FDX begin their hectic holiday season.

Distillate Inventory Chart

(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. The number of active gas rigs at 349 in June was an 18 year low. Oil rigs at 1,412 in July was an eight-month high. Crude oil at 397.6 mb on May 24th was the highest since 1931.)

Inventory Snapshot

Crude prices fell for the fifth day as tensions continue to cool over Syria. The five nations working on a Security Council resolution said today they are very close to the finished version and it could be presented later this week. Apparently Russia is giving in on the press for military force if Assad fails to live up to the deal. It is not done yet but the parties are all saying positive things.

Iran's new president and President Obama did not meet at the U.N. and the calming words before the U.N. meeting tended to become a little rougher afterwards. Iran still maintains it is ready to start a new round of talks and is ready for results. Talk is cheap. Iranian officials rejected a possible informal encounter between Obama and Rohani while both leaders were at the UN on the same day. They said it was for "domestic political considerations."

President Obama said the recent Iranian overtures may offer a basis for a "meaningful agreement" to resolve questions over the nuclear program. The U.S. is "encouraged" on the overtures from Rohani but Obama said "Conciliatory words will have to be matched by actions that are transparent and verifiable." Reagan said, "Trust and verify" when talking about deals with Russia. The same holds true with Iran and currently there is no verification. They flatly deny access to specific sites by the IAEA. Their refusal to allow inspections and determination to accelerate uranium enrichment has cost them more than $100 billion in lost foreign investment and oil revenue. They have dropped from being the second largest OPEC producer to number six.

There are no tropical storms in the Atlantic at this time. This is causing some serious head scratching by forecasters. This season was predicted to be a more active season than normal. With the statistical peak of the season two weeks ago it is shaping up to be the first season in two decades without a major storm. Currently the Atlantic is full of dry air and storm killing winds and there is nothing in sight for at least 7-10 days. Forecasters claim hurricane prediction is so difficult it keeps you humble when the forecasts fail more often than not.

Colorado State forecasters predicted 18 storms, 8 hurricanes and 3 major storms. The National Oceanic and Atmospheric Administration (NOAA) predicted a 70% chance of 13-19 storms, 6-9 hurricanes and 3-5 major storms. So far there have been nine storms and only two storms that made it to hurricane status but they all evaporated just as quickly. Mexico has been getting hammered by these junior storms with 130 people killed two weeks ago by flooding as a result of heavy rains rather than wind damage.

Forecasters made their predictions based on warmer water temperatures, a strong West African monsoon and the lack of a Pacific El Nino. Instead there has been very strong wind shear at different altitudes that "ripped storms apart" and prevent them from growing. Humidity across the Atlantic is typically about 30% but has hovered at 20-25% this year. The dry air is not conducive to storm formation. Travelers Insurance (TRV) said the lack of storm losses has allowed them to buy back $633 million in stock since June 30th this year. AccuWeather said there has never been a storm make landfall on the Texas coast past the middle of October. Weather patterns push storms away from Texas and the northern Gulf in October. More than 23% of U.S. crude production comes from the northern Gulf.

The forecast for minimal storm formation in October is also allowing oil prices to decline. The season is over on November 30th but once into October the chances lessen each day.

Rising Libyan production also weighed on crude prices. Production rose from 150,000 bpd to 800,000 bpd now that the strikes have ended. That compares to the high in April of 1.4 mbpd. Production in Iraq is also rising and will be 3.6 mbpd by the end of December. That is up +400,000 bpd from earlier this year.

Clive Capital, the $1 billion commodity hedge-fund founded by Chris Levett, is shutting down as of the end of September after posting two years of losses. They are unwinding commodity positions and that is also affecting crude prices. Nobody knows if they are liquidating crude longs but the market is taking positions on the assumption they were long not short.


The equity market is fading rather than in full decline. The major indexes were positive early in the day on Wednesday but closed with losses. The Dow gave back -61 points to close at 15,273 and below support at 15,300. The next material support is well below at 14,850.

The S&P gave back -5 points to close at 1692 with support at 1680-1685. The Nasdaq lost -7 and continues to hold the majority of its early September gains. The Russell 2000 continues to be the most bullish index with the lost of only -1 point after hitting a new intraday high on Tuesday. As long as the Russell remains strong we are expecting a decent rally once the Washington headlines fade.

I still believe the Washington induced volatility will cause some market declines over the next two weeks. Most investors are assuming everything will eventually work out alright the same way Egypt, Syria, Larry Summers and the FOMC decision did. I agree there will eventually be a resolution to the Washington war but the battles still need to be fought. Look to buy stocks cheaper over the next two weeks.

Jim Brown

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