Inventory Surge

Jim Brown
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For the third consecutive week crude inventories have surged and there was a tidal wave of crude added last week. Inventories rose by nearly 7 million barrels.

Crude inventories surged by +6.8 million barrels following a 5.5 million barrel rise last week and a 2.6 million barrel gain the week before. The surge is following the normal seasonal patterns but at a faster rate than normal. Crude demand in the U.S. declined sharply and despite a drop in imports of -320,000 bpd inventories rose.

Refinery utilization plunged from 89% to 86% and the lowest level in months. This is the level we would expect to see this time of year as more plants shut down for maintenance. Input of oil to refiners declined from 15.45 million barrels per day to 14.89 million. That was a huge decline of 560,000 bpd. U.S. production rose +25,000 bpd to another 18 year high at 7.81 mbpd.

Cushing inventories fell for the 12th consecutive week to a level of 32.6 million barrels. We should be only weeks away from an inventory spike at Cushing as producers begin to send oil there ahead of the opening of the new pipeline to the Gulf in late November.

Crude inventories are now outside the five year average range and are +1.1% higher than the same period in 2012.

Oil Inventory Chart

Gasoline inventories rose to 219.9 million barrels, a gain of +149,000. Gasoline demand increased by 319,000 bpd to 8.85 mbpd. Demand should continue to weaken in the weeks ahead until the Thanksgiving shopping season begins. The EIA said production increased by 320,000 bpd but with refinery utilization declining sharply that number is suspect. It could be a factor of the shutdown affecting data collection. Gasoline inventories are now 12.5% over year ago levels.

Gasoline Inventories

Distillate inventories declined sharply losing -3.1 million barrels. This is more than likely due to the increased demand for home heating oil. However, distillate demand remained flat with last week at 3.83 mbpd. This would suggest the drop in refinery utilization was primarily in distillates. Production declined -268,000 bpd while imports rose +54,000 bpd. Distillate inventories are still +4.3% above their year ago level.

With stronger prices for distillate fuels overseas the refiners with export capability have been exporting distillates rather than put them in inventory. Thus the relatively low levels of distillate inventories.

Distillate Inventories

(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 inventory additions should fade in the coming weeks once production of winter fuels begins. Refineries are taxed on the amount of oil in inventory on December 31st so they normally let inventories decline from Thanksgiving through New Year's Day.

Crude prices fell sharply after the inventory report and are threatening to break below the September lows. As refinery utilization declines we should see lower prices for crude. The offset to the utilization is the continued unrest in the Middle East. Egypt was the scene of mass protests over the weekend with many deaths. Iraq saw more than 60 people killed in terrorist attacks. Until these events fade the premium under Brent will remain and that supports WTI prices.

Prices for refined fuels are declining. The average price for gasoline fell -6 cents to $3.37 and some areas are already seeing discount gas under $3.00. The average price is not -48 cents below year ago levels. Diesel prices rose +2 cents to $3.90 but still -20 cents below year ago levels.

The EIA inventory reports have been produced by a skeleton crew and may not be available next week if the shutdown in Washington is still in place. Monday is Columbus Day and government offices are closed. If the inventory report is produced it will be on Thursday rather than Wednesday.


We may be nearing a solution in Washington. The markets rebounded slightly today after Janet Yellen was nominated to replace Ben Bernanke as the Fed chairman. The markets like Yellen because she is the most dovish member of the Fed committee. Under her reign QE is expected to last longer and interest rate hikes could start a year later.

President Obama met with the Democrats in the White House today and will meet with 18 House republicans on Thursday. This is for the president to be able to check off the box that says he met with republicans to talk about their complaints. This also fills a republican demand to have the president sit down with them to discuss budget options. They get their box checked as well.

What is likely to transpire is a plan to pass a temporary budget and debt ceiling bill to take the attention off the government shutdown and put everyone back to work. In exchange for the clean budget bill the president will probably agree to some concessions to be implemented before the short term extension expires. Timelines mentioned in the press were three-weeks to as late as December 31st for the new deadlines.

If the republicans come out of the meeting saying they have reached a potential agreement to reopen the government and extend the debt ceiling the market should rally significantly. If they come out with sour faces and start hurling hostile sound bites then the market goes lower.

I would buy a rebound from this level if there is daylight on the debt ceiling issue.

Jim Brown

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