Oil Inventories Unexpectedly Rise

Jim Brown
 
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Despite multiple events that prevented some oil imports from reaching refineries last week the EIA and API both reported rises in crude inventories. Rising inventories and low demand should mean an end to the rally in crude prices.

The EIA said crude oil inventories rose by 2.3 million barrels when most analysts expected a decline. The API numbers showed an increase of 4.7 million barrels. Given the blockage of the Sabine Neches waterway for five days and a backup of 16 tankers in the gulf waiting to enter to unload I expected to see a sharp drop in inventories.

I theorized in another commentary that the bump in crude could have come from the remaining deliveries of those cargoes that were held offshore until after year end in order to avoid property taxes that accrue on 12/31. The EIA said imports spiked sharply last week by an additional 559,000 bpd. They had to come from somewhere and analysts believed it was the surge from the Houston ship channel closing for fog in the prior week.

Another possibility is simply nobody was refining it last week. We saw that refinery utilization rates fell to 77.7% and roughly 13% below normal levels. Refineries are having a hard time making any money and several refineries have been shutdown temporarily to reduce costs. Others are running at minimum volumes just to keep the processes flowing.

Distillate inventories fell by 900,000 barrels and gasoline fell by 1.3 million barrels. Since demand didn't spike last week that suggests refiners were simply refining less.

EIA Inventory Report

I have also heard that some refiners are using this period of low demand to shutdown individual components for early spring maintenance. Normally refineries take sections offline in March to perform maintenance and switch over to summer fuel blends. Those blends have higher oxygen components to reduce summer time smog. There is less need for heating oil and more demand for jet fuel.

All of these things play into the weekly inventories and I think the biggest indicator is that 77.7% utilization. That is a clear indicator of gasoline demand and as long as it is dropping we should see lower oil prices. You can see in the graphic above that utilization was near 90% in early December and it has fallen to an all time low level outside of hurricane induced shutdowns.

Distillate inventories are 9.8% above year ago levels but this is well below the 32% above rate back in November. Refineries have been producing less in order to bleed off expensive inventories and try to raise crack spreads. Gasoline inventories are now only 3.6% above year ago levels.

This report suggests the rally on Monday/Tuesday should fail because we should see another supply spike next week. Of course the majority of this weeks spike in crude prices was due to short covering triggered by the falling dollar. The current Greek tragedy in play now will control the dollar for weeks to come unless something miraculous is done by the Eurozone. As energy traders we will be hostage to that dollar fluctuation.

Jim Brown

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