Four Month Inventory High

Jim Brown
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Crude supplies in the U.S. surged for the fifth consecutive week despite a sharp drop in imports. Rising U.S. production and low demand is the reason for the continued gains.

Oil inventories rose by +5.2 million barrels and well over consensus expectations for a +1.7 million barrel build. Imports declined by 340,000 bpd but U.S. production rose by a whopping 470,000 bpd over the prior week to a new 18 year high at 7.9 mbpd. The prior week was probably impacted by the government shutdown as it showed a decline of -380,000 bpd. I suspect there was a number missing somewhere. To lose and gain 380,000 bpd for just a week would have been an outage of major proportions and on every news channel. Crude inventories are breaking out of the five-year average range and could set a new high in the week ahead.

Cushing inventories rose for the second week as producers begin to send more oil in that direction in anticipation of the new pipeline opening to the Gulf in late November. I discussed this probability a couple weeks ago in the pipeline discussion.

Refinery utilization declined to 85.9% and a seasonal low as more refineries are shut down for maintenance and to shift over to the winter fuel blends. This is another reason for the rising crude levels. Refiners are simply not refining as much crude during maintenance periods. Refiner inputs have declined from 16.11 mbpd to 14.86 mbpd over the last five weeks. Refined products supplied declined to a three month low at 18.27 mbpd.

This would probably be a good spot to point out the output gain from the refining process. Refiners only processed 14.86 mbpd but supplied 18.27 mbpd of product. When they crack crude oil into the various components they get more out than they put in. Heavy crude produces more product than light crude. The refined products are the result of cracking or cooking the oil down into its basic components and the volume grows as the lighter products have more volume.

Gasoline inventories declined -1.8 million barrels but this is the time of year where refiners and wholesales are required to flush their tanks of summer fuel blends and then refill them with winter blends. We should expect to see gasoline inventories decline for the next couple of weeks. November 1st is theoretically the mandatory switchover date. Gasoline inventories are at the top of their five-year average range but proceeding according to the seasonal pattern.

Distillate inventories rose 1.5 million barrels to 125.8 million. That was the first increase in five weeks. The build was due to a sharp drop in demand of -401,000 bpd. This was probably related in some way to the government shutdown but that would be just a guess. Distillate inventories are at the bottom of the five-year average and trending normally.

(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.)

The UK Daily Mail ran an article titled Saudi Arabia Severs Diplomatic Ties with US with some uncharacteristic strong words from various Saudi officials. While the actual article does not actually claim the deed has been done it appears Saudi is very upset with the USA. Saudi's intelligence chief is vowing they will make a "major shift" in relations with the US to protest perceived American inaction over Syria and the recent overture to Iran.

Prince Bandar bin Sultan told European diplomats that the US had failed to act effectively against Syria's Assad and on the Israeli-Palestine conflict. He said the U.S. was growing closer to their arch enemy Tehran. The prince also criticized the U.S. for a lack of support when it crushed an anti government revolt in Bahrain in 2011.

Prince Turki al-Faisal called Obama's policies on Syria "lamentable" and ridiculed a deal to eliminate Assad's chemical weapons. "The charade of international control over Assad's chemical arsenal would be funny if it were not so blatantly perfidious and designed to give Mr. Obama an opportunity to back down from military strikes."

The Saudi criticisms came on the 40th anniversary of the OPEC oil embargo against the USA for helping Israel in the Yom Kippur war.

Saudi rejected a coveted two-year term on the U.N. Security Council in a display of anger over the failure of the international community to end the war in Syria and act on other Middle East issues. The prince said the decision was based on the "ineffectual experience of that body."

The lengthy article has numerous references from multiple officials that seem to suggest Saudi Arabia is falling out of friendship with the USA. However, last week they bought $10.8 billion in missiles, munitions and bombs. In addition to the air launched cruise missiles they bought 1,000 GBU-39 bunker-buster bombs and the UAE bought 5,000 of the same weapons. Cruise missiles and thousands of bunker-buster bombs to go on their F-15 and F-16 fighters? It sure looks like they are about to go to war. Buying bunker-busters rather than normal air to ground munitions is definitely a nod to Iran. They could be arming for their own preemptive strike on Iran's underground nuclear facilities. Don't think that Iran did not hear the news and already reached the same conclusion.

I would assume Saudi Arabia would take delivery of the weapons before they sever ties with the USA so maybe this was a last minute shopping trip.

Here is another link to a story on Bloomberg: Obama Can Safely Ignore Saudi Tantrums"



The markets proved vulnerable to earnings disappointments with a minor decline from record highs on Tuesday. Companies are warning on Q4 and quite a few are starting to miss estimates. Caterpillar (CAT) was a big decliner on the Dow today with a loss of -5.41 after missing estimates and warning. Boeing offset Cat's decline with a gain of +6.54 on positive earnings.

This has been the story of this earnings cycle. No mercy is shown to those that miss and positive earnings and guidance is rewarded.

The five-day drop in crude prices took the bloom off the energy sector. In reality many of the high flying producers had been making record highs and acting like momentum stocks. When the wind came out of the sales on stocks like Netflix, Tesla, Panera, etc the winners in the energy sector were being sold as well. I warned several times over the last couple weeks that mutual funds would be faced with either holding winners or taking profits ahead of their fiscal year end on Oct 31st. It appears some decided to take profits and we still have a few days to go.

Jim Brown

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