Refined Products Drop Sharply

Jim Brown
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The market press was all excited about the sharp drop in product inventories and their headline coverage caused a strong short squeeze in crude.

If they had followed the oil market long they would have understood that product inventories dip in late October and early November as a result of the changeover from summer blends to winter fuel blends. I am not as excited as everyone else. While the declines were strong there was nothing to get excited about.

Crude inventories rose for the 7th consecutive week and are now only about 12 million barrels from a 30 year high. Inventories rose +1.6 million barrels to 385.4 mb with the 30 year high at 397.6 mb that was set in May of this year. The inventory build was lower than the prior weeks because of a drop in imports of -235,000 bpd.

Refinery utilization fell from 87.3% to 86.8% but that was just noise. Cushing inventories rose from 35.5 mb to 36.5 mb as producers continue to ship more oil in that direction in anticipation of the new Cushing to the Gulf pipeline opening late this month. They have to have inventory on hand to fill it. How much oil does it take to fill a 500 mile pipeline before the first barrel reaches the southern end?

Gasoline inventories fell -3.8 million barrels in the 4th consecutive weekly loss. The decline was about twice the average of the prior three weeks. Gasoline demand rose unexpectedly by +238,000 bpd while production fell from 9.434 mbpd to 8.352 mbpd and that was the real reason we saw the big drop in inventories. That -1.1 mbpd decline produced nearly 8 million barrels less gasoline than the prior week. It is no wonder inventories declined. Refineries are not worried and should have completed their fall maintenance by now. The official cut over point for winter blends was November 1st and this inventory report was for the week ENDED on Nov 1st. I suspect there were some last minute blend switch issues at more than one refinery.

Phillips 66's Ponca City, Oklahoma (198,000 bbl/d); Motiva's Norco, Louisiana (234,000 bbl/d); and Tesoro's Golden Eagle, Martinez, California (166,000 bbl/d) all recently completed work on units. Units at Marathon's Garyville, Louisiana (522,000 bbl/d); Philadelphia Energy Solutions's Philadelphia, Pennsylvania (335,000 bbl/d); and Valero's Three Rivers, Texas (93,000 bbl/d), are currently undergoing planned maintenance.

Look at the inventory chart below. With inventories at the top of their 5-year range and proceeding lower as would normally be expected you can see why there was no reason for concern by professional traders. Note also that inventories should begin to rise over the next three weeks.

Distillate inventories declined -4.9 million barrels. That was the largest decline in more than eight-weeks but nothing to be concerned about. In the chart below I would note that the low for the five year range is still about three weeks away and then I would expect a rebound to begin.

Distillate demand rose unexpectedly by +356,000 bpd, production was flat and imports rose a minor +82,000 bpd. The days of supply for distillates now stands at 30. That is the lowest level since June 28th BUT it is a seasonal event. Over the prior two years the average for the first week of November was 32.1 days. Northeastern consumers are loading up on heating oil and drawing down on inventories.

U.S. production was basically flat with last week at 7.86 mbpd. That is just below the recent high at 7.9 mbpd three weeks ago. Drilling normally slows in the winter so the overall production increases we have seen this summer will probably slow.

Gasoline prices continue to fall with the average price of gasoline at $3.23 on Wednesday. A large part of the south is now paying below $3.00 per gallon while some people on the opposite coasts are paying over $4. The recent drop in crude prices has not yet been fully priced at the pump. We should see another dip in gasoline prices next week then the ramp up towards Thanksgiving will begin. Colorado shows to be in the $3.21-$3.26 range but I paid $3.06 on Tuesday.

AAA Gas Price Chart

Crude prices rebounded today on a headline induced short squeeze but I suspect it is just temporary. We could see another dip to around $91.50 before the winter demand starts pushing prices higher. However, global production is returning to normal with Libya, Nigeria and Sudan seeing exports increase after long outages. The violence in Egypt has faded and Syria has moved to the back burner. Worries over the security of future oil production have faded. Saudi Arabia will have to cut back on production to support prices. After pumping at high levels for the last couple of years their fields need a rest even if the Saudi treasury needs the dollars instead. They have to balance future production capacity with the desire for current income. It makes no sense for them to maintain existing high production levels with prices continuing to fall. The burden to balance price stability for all of OPEC falls on their shoulders.


The one real problem still to be dealt with is Iran. Talks are scheduled to resume in Geneva on Thursday and commentators on both sides have little hope for any resolution. Senator Mark Kirk said Wednesday that sanctions still need to be tightened despite the apparent softening of the tensions. "It just seems like a long rope-a-dope." Iran's new president was previously a negotiator in the nuclear talks. He bragged several times after that position ended that Iran was successful in delaying action by Western nations through a carefully scripted series of negotiations that went nowhere on purpose. Why should we think the outcome will be any different today with him as president? Iran is in permanent stall mode while they build up their enrichment capability and stockpiles of enriched uranium.

Iran will celebrate its annual rally to mark the 1979 takeover of the U.S. Embassy. Citizens will take to the streets by the hundreds of thousands chanting "Death to America." On Monday one of the largest demonstrations in years saw protestors burn American flags. Why should we expect the government to negotiate seriously? The talks are seen as cosmetic rather than constructive.

Four out of five Iranians claim the sanctions have hurt them personally but more than half say Iran should maintain its nuclear program in the face of international pressure. Friday's national prayers urged Iran to take a "tough line" in the negotiations.

Brent Prices Fixed

A team of traders filed a new lawsuit against multiple oil companies claiming they artificially manipulated the price of Brent futures. This is the seventh suit with six others previously filed by others. The suit claims BP, Statoil, Shell, Morgan Stanley, Phibro Trading and Trafigura Beheer BV submitted false and misleading information to Platts, an energy news publisher that produces quotes used around the world.

The suit describes 85 pages of details on how the markets were manipulated using spoofed orders and supplying misleading information. The spoofed orders were for large quantities of futures at a price away from the actual market in an attempt to move the price in that direction. The orders would then be cancelled after the price moved in the target direction. For instance on one occasion Shell offered to sell a large amount of Forties blend crude in order to push the prices down on the spot market. Morgan Stanley bought one of four such "offers" in order to artificially push the spot prices lower. According to the complaint the transaction was prearranged. The suit alleges Shell had a short position in the market that benefitted from the price manipulation.

More than 50% of the oil traded globally is indexed to Brent prices. Manipulating the Brent contracts impacts prices paid for millions of barrels of crude every day. It will be years before any court verdict is issued and the odds are good it will be settled in advance rather than risk a judgment that could see penalties based on billions of barrels of crude traded since 2002. The suit is asking for damages for all investors that traded Brent futures since 2002 when the alleged manipulation began.


Wednesday was a tale of two markets. The Dow was up +128, S&P +7 while the Nasdaq lost -8 and the Russell 2000 declined -5. This was a continuation of the big cap rotation we have been seeing since the fiscal year end for funds on Oct 31st. Apparently funds are rotating out of the risky small caps and into highly liquid big caps in anticipation of a future market correction.

The Dow closed at a new high at 15,744 while the Nasdaq continued to languish around 3,930 as it has for the last three weeks. The Nasdaq gave up a promising close on Tuesday to retreat to the lowest close for the week.

The market appears to be setting up for a bout of profit taking but November is normally a bullish month. If we do see a market dip I expect it to be bought.

Jim Brown

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