Inventories Continue to Rise

Jim Brown
 
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Crude inventories rose again last week and are now only 9 million barrels away from setting a new 83 year high at 398 million. The prior high was in May at 397.6 million barrels on May 24th.

There is obviously no shortage of crude oil. U.S domestic production soared last week to 7.981 mbpd and the highest level since January 27th. 1989. The EIA said the Bakken should be producing over 1.0 mbpd by year end. That is quite a change from the 10,000 bpd just ten years ago.

Crude inventories rose by +2.6 million barrels to 388.1 million. The main cause was a sharp spike in imports of +620,000 bpd. Demand for crude actually rose by +343,000 bpd as refinery utilization rose from 86.8% to 88.7%. Inventories at Cushing rose for the fourth week to increase from 36.5 million to 38.2 million barrels. Remember, the new pipeline from Cushing to the Gulf coast is set to open by the end of November so producers are sending more oil to Cushing to benefit from that pipeline.

Distillate inventories fell slightly by -500,000 barrels despite a sharp drop in demand of -722,000 bpd. That is a huge drop considering demand was 4.51 mbpd the prior week. Apparently the demand to top off the heating oil tanks has passed. Jet fuel demand should rise in the coming weeks as the holiday travel season arrives. Distillate imports also declined by -96,000 bpd.

Gasoline demand declined slightly from 9.29 mbpd to 9.03 mbpd and gasoline inventories fell by -800,000 barrels. This was a drop in the bucket compared to the -3.8 million barrel decline in the prior week. Gasoline production increased by +360,000 bpd to compensate for the prior week's inventory decline.

The WTI-Brent spread has risen to nearly $15 from a low of $3 back during the summer. This is a direct result of the discounting of crude from the shale fields where it is sold at a discount to WTI in order to compensate for transportation charges. As additional pipelines are opened this discount will evaporate. When the Cushing to the coast pipeline opens in the next couple of weeks the spread should shrink. Landlocked producers will be able to transport more of their oil to the gulf refineries and sell it for a higher price.

However, as long as that red line in the chart below remains so far above the five year average the price of WTI will remain under pressure.

The price for Bakken crude at the Clearbrook Minnesota terminal is currently trading at $16 below WTI prices and has been more than $10 below WTI for more than a month. This is a direct reflection on takeaway capacity from the Bakken.





Another factor supporting Brent prices over WTI is the sudden reversal of fortunes in producing areas in the Middle East and Northern Africa. Libya was on the road to recovery in September as the strikes ended and production was being restarted. Over the last several weeks violence has reappeared and production has declined sharply. The 340,000 bpd El Sharara field and the 160,000 bpd Mellitah export terminal were closed by demonstrations. Currently Libyan production was shrunk to around 250,000 bpd and exports to 100,000 bpd. Libya was producing about 1.6 mbpd prior to the civil war.

In Iraq daily violence is a way of life and unplanned security related outages have reduced productin by -740,000 bpd since September. The Kirkuk-Ceyhan pipeline has been under constant attack and has reduced exports by -340,000 bpd. A planned outage to upgrade the southern export terminals has reduced exports by another -400,000 bpd. This production is likely to remain offline until early 2014.

Unplanned disruptions in the MENA countries is now around 3.0 mbpd. This has helped provide buyers for Saudi Arabian crude and the country is back to pumping around 10.0 mbpd to fill this void. This has reduced the claimed global spare capacity to 1.7 mbpd and the lowest level since 2008. If it were not for the increased supply in the U.S. slowing the demand for Nigerian crude and allowing it to go elsewhere the price of oil could be much higher.

The EIA expects Brent prices to move lower as these disruptions end and additional new production comes online. They are targeting $101 as the average price for Brent by the end of 2014. The EIA is terrible at predicting prices but this time they could be right.

Gasoline prices declined to $3.19 in the U.S. last week. That is 26 cents lower than the same period in 2012 and the lowest price since February 2011.



The number of active rigs in the USA increased by 8 last week. Oil rigs rose by +2 to 1762 and gas rigs gained +5 to 370. Miscellaneous rigs rose by 1 to 7. This time last year there was 1809 active rigs.

The rise in gas rigs is driven by the need to secure leases with production. Leases expire unless they are drilled and produced. However, if the lease is for 10,000 acres not all of it has to be drilled. Typically only a couple wells are required to hold the leases. The producer can come back later and drill out the rest of the lease.

When gas exploration was exploding in the Marcellus and other shale areas the land men were working night and day to sign up every available piece of property. Now it is up to the exploration companies to punch holes in every lease or risk losing it.

Market

All the major indexes rallied to new highs on the warm and fuzzy comments about QE by Janet Yellen on Wednesday. The major indexes came to within a few points of their respective round number resistance. The Dow could touch 16,000, Nasdaq 4,000 and S&P 1,800 on Monday with almost any kind of a positive market.

What happens after they touch those numbers is the $64 question. I am expecting a pause in the climb but we never know because Mr Market exists to confound as many people as possible on any given day.

Jim Brown

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