Rising Inventories, Rising Prices

Jim Brown
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A sharp increase in crude inventories with demand declining should not result in a spike in crude prices. However, headlines rule and WTI rose +1.75 on news of the future.

The market moving news was from TransCanada Corp (TRP). They said the new 700,000 bpd pipeline from Cushing to the Gulf Coast would be completed before the end of October. The pipeline is upgradable to 830,000 bpd. This caused a spike in the price of WTI because it will make more WTI available on the coast where it will compete with Brent prices. That means Brent will ease down slightly, depending on events in the Middle East, and WTI will rise to meet Brent prices.

Cushing inventories have been in decline for the last ten weeks as producers and refiners ship oil by rail to the coasts. Cushing's lack of takeaway capacity caused WTI prices to plummet last year as inventories rose. With the additional takeaway capacity those shale producers will have an alternate outlet for their crude and we can expect to see Cushing inventories begin to rise in the weeks ahead in preparation for the pipeline opening.

TransCanada said additional work will be required after the construction is completed but that work is also nearing completion in November. Commissioning of the pipeline is already underway with line fill expected in late November with full operations expected before the end of December.

At the close today WTI was $104 and Brent $109. That $5 spread will shrink once the pipeline begins operation.

The spike in WTI prices caught many traders off guard after the EIA report showed a whopping +5.5 million barrel gain. I theorized two weeks ago that the -4.4 million barrel drop in crude inventories and the 402,000 bpd decline in imports was due to disruption of tanker traffic when that flurry of tropical storms were popping up all over the Atlantic east of the Caribbean. I said I expected large increases over the next two weeks as that backlog of tankers finally arrived in port. Last week we saw inventories rise +2.6 million barrels and then a +5.5 million barrel spike this week. It appears the theory was correct. Imports rose +438,000 bpd to 8.36 million barrels last week for a gain of +3.1 million barrels over the prior week. Inventories are trending right at the top of the five year range due to the low demand for refined products.

Refinery utilization declined from 90.3% to 89.0% and should continue falling as refiners shut down for maintenance and to switch over to winter blend fuels.

Oil Inventory Chart

Gasoline inventories rose +3.5 million barrels because of a -320,000 bpd decline in demand. We should be seeing the impact from the Colorado floods. Hundreds of thousands of people were shut in by torrential rains and the closure of more than 200 roads including Interstate 25 for several days. There are still massive shutdowns with roads and bridges washed away. While the demand for fuel was diminished for the two weeks of the floods we should be seeing an increased demand in future weeks because of the additional drive time to go around areas that are still closed plus the demand from an army of repair crews numbering in the thousands of workers that have descended on the area.

This is a low demand period for gasoline so the added demand from Colorado may not be readily seen. Gasoline demand declined to 8.53 mbpd and a multi-month low.

Distillate inventories declined -1.7 million barrels as people began filling up on home heating oil. We are also moving into the holiday season and stores are starting to stock up for Halloween, Black Friday and then the Christmas season. This increases diesel demand for trucks delivering products and within four weeks the UPS and FDX online shopping holiday rush will begin. Distillate demand rose +250,000 bpd.

(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


Lookout below. The top four congressional leaders met with President Obama in the White House for an hour and the meeting was described as "cordial" but both sides were unrelenting on their demands. The headlines turned from hopeful ahead of the meeting to hostile after the meeting. Representatives were screaming at each other in the House and storming out in anger.

The lack of any progress on the budget and the even worse battle expected for the Debt Ceiling in two weeks means this shutdown could continue for days or even weeks. The republicans have bet their elections chances in 2014 on the outcome of these negotiations. The president is trying to rebuild his political capital after the Syrian debacle and he is definitely not going to back down on implementation of Obamacare. We have a solid stalemate and the outlook is getting worse. The S&P futures are down -7 at 8:PM and still falling.

I still believe the Washington induced volatility will cause continued market declines over the next two weeks. Look to buy stocks cheaper over the next two weeks.

Jim Brown

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