Another Week of Inventory Gains

Jim Brown
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Prices for crude oil collapsed below $95 after U.S. inventories rose strongly for the sixth consecutive week.

U.S. crude inventories rose +4.1 million barrels to 383.9 million and a +28.2 million gain over the last six weeks. The gain was really unusual since demand at the refinery level increased to a four-week high and refined products supplied to the market at 20.14 mbpd was a multi-month high.

Crude oil imports also fell by -200,000 bpd to 7.46 mbpd. U.S. production declined slightly from 7.9 mbpd to 7.85 mbpd.

Inventories at Cushing rose for the second week with a 2.2 million barrel gain. This is due to producers diverting more production to Cushing ahead of the late November start of the new Gulf Coast pipeline.

Gasoline inventories continued to decline as expected as the summer fuel blends are sold off and replaced with winter blends. Gasoline inventories declined -1.7 million barrels. Gasoline demand rose by 207,000 bpd and production increased by +257,000 bpd to keep pace.

Distillates declined -3.1 million barrels due to a rise in distillate demand of +257,000 bpd. Increased demand in heating oil and diesel were offset by a +99,000 bpd increase in imports.

Refinery utilization rose unexpectedly from 85.9% to 87.3% after what appears to have been a shortened maintenance cycle. This higher utilization should begin to draw down on crude levels or at least slow the upward progression.

Active oil rigs increased by +19 last week. However, active gas rigs fell by -12. Miscellaneous rigs increased by +1 to 6. That pushed the total active rig count to 1742 for a gain of +4. Rig counts should begin to decline as cold winter weather approaches.

Crude prices plunged nearly $3 last week to close at $94.61 and is now approaching support at $91 from June. Brent fell almost $3 after some surprising economic data from Europe.

The rising dollar had a direct impact on the rising price of oil. The Dollar Index closed at 80.71 and a two month high. The index was up 150 basis points in only a week. This depressed gold, silver and oil.

The sharply rising Chicago ISM, formerly Chicago PMI, to a 2.5 year high was the reason behind the strong dollar.

Combine the rapidly rising crude inventories, rising U.S. production, calming of tensions in the Middle East and the strong dollar and it is no surprise crude prices are falling.

Libya also announced it was reopening the 110,000 bpd oil terminal at Al-Harriga on Monday. With Libyan oil coming back online and tensions possibly easing on Iran and suddenly the outlook for oil prices is weakening.

The output from the Gulf of Mexico is set to increase sharply over the next two years. More than 700,000 bpd of new production is set to come ashore soon. Shell's 120,000 ton Olympus platform was recently towed out to sea with production to begin soon on its 100,000 bpd capacity. Experts believe there are still 48 billion barrels of recoverable oil in the Gulf. Of course nobody knows what it will cost to extract those barrels. The Lower Tertiary trend 200 miles from shore is thought to contain 15 billion barrels. Anadarko's Shenandoah could possibly hold up to three times the initial estimate at 300 million barrels. Exxon's Hadrian field it thought to contain 700 million barrels.

Wells cost up to $150 million to drill and billions to complete and produce if a platform has to be built to handle the production. Chevron's Jack/St Malo project platform cost $7.5 billion and will be anchored in 7,000 feet of water to produce wells 26,000 feet deep. The platform's initial capacity will be 170,000 bpd but could double as new wells are brought online. Chevron's Big Foot platform will be even more complex with 16 miles of steel cable anchoring it to the sea floor.

Adding 700,000 bpd of Gulf production will be the equivalent of adding another Bakken field to the production portfolio. Only the light sweet oil from the Gulf is going to be piped directly to the coastal refineries. That will create a surplus at those refineries that will cut down on imports. It will also force shale producers to ship oil to other locations in order to overcome the eventual price decline caused by an oil glut on the Gulf coast. Currently Bakken crude sells for a discount of $9 to WTI to offset the cost of transportation.


The markets struggled to a minor gain for the week with the Dow up +45, Nasdaq -21 and S&P with just under a 2 point gain. The Russell 2000 was the big loser at -22 or -2%.

Since the economic news was positive, the Fed still on hold and earnings actually better than expected we should have seen a stronger market. However, with the mutual fund year end on October 31st there was plenty of portfolio restructuring and profit taking in momentum stocks either ahead of year end or immediately afterwards on Friday. That restructuring is probably not over but with the Fed out of the way and economics improving the path of least resistance should be up.

Jim Brown

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