Inventories Rise Again

Jim Brown
 
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We are getting pretty close to the end of this trend but crude levels rose for the tenth consecutive week and pushed WTI prices to a five month low.

June 3rd was the last time we saw crude prices at $92. The strong series of crude gains has pushed the inventory levels to 391.4 million barrels and that is very close to hitting the 397.6 million level that would be the highest since 1931. I doubt that is going to happen since refiners normally reduce inventory levels before year end to lower the taxes due on inventories on December 31st.

However, U.S. crude production rose to 8.019 mbpd and the highest since 1988. Refiners can't do anything about the crude coming in from the U.S. producers but they can cut imports. While that sounds easy it is a little more difficult. Most refiners contract well in advance for crude deliveries from their preferred supplier. They tune their refineries to process that exact grade of crude for maximum output. In order to cut future deliveries they would have to make changes to their process to handle a different type of oil. Some changes are easy and some are not.

Refiners also contract on the spot market. Rather than have all their expected demand contracted for many months in advance they do fade the requirements slightly. If something happened to the economy and demand suddenly declined they don't want to have more oil stacking up in storage every week. They might contract for 85-90% of their expected demand and then buy additional oil on the spot market if they need it. This is the buying that will be cut as inventories continue to rise.

Lastly, with WTI at $92 today and Brent at $111 there is considerable profits available if they can shift their demand to WTI and away from Brent imports. That $19 spread is almost pure profit because coastal refiners are producing gas and diesel with a $111 base cost and that sets the price for the refined products. Those refiners with access to domestic WTI have a built in profit margin over Brent products. This is why shares of Tesoro (TSO), Valero (VLO) and Holly Frontier (HFC) are soaring. Their profit margins are expanding every day.

Gasoline inventories rose +1.8 million barrels after six weeks of declines. Even with the declines the inventory levels are +3.1% above year ago levels. Crude is 4.6% above year ago levels. Gasoline demand was flat at 8.91 mbpd and down slightly from the 9.05 mbpd average from the prior six weeks. However, Black Friday kicks off the holiday shopping season and gas consumption will move higher. More than 50 million people are expected to travel for Thanksgiving weekend with 38 million going by car and that will also burn a lot of gas.

Distillate inventories declined by -1.7 million barrels. This was probably due to airports loading up on jet fuel for the holiday weekend travel and possibly some additional heating oil demand ahead of the winter storm heading for the northeast. However, the EIA reported that distillate demand declined -309,000 bpd for the week. That seems contrary to conventional wisdom but there are always some holes in the data collection process.

Refiners increased utilization to 89.4% and a level not normally seen at this time of year. As I stated before it is profitable for refiners to operate at the current price levels and they can ship the refined products or even export them to take advantage of the high margins from low WTI prices.


Note in the chart below that the red line of current inventories is breaking out and very close to exceeding that multi-decade high from June. With this much oil in inventory the price for WTI should remain under pressure.


Gasoline stocks are trending right in line with the historical range and starting to uptick at exactly the right moment. They should rise from here and peak again in March.


Distillate inventories are falling out the bottom of the five-year range. Distillate inventories are -1% below year-ago levels. The year long trend to the bottom of the average range is troubling. I don't have an answer for why this is happening. We have the capacity to make distillates and we import distillates every week. We imported 61,000 bpd last week.


The EIA said prices for regular gasoline were $3.29 and 14 cents lower than last November. It was the lowest level ahead of Thanksgiving since 2012.

The weekend deal between Iran and the 6 UN nations is on rocky footing. Iran is claiming the U.S. is misrepresenting the deal and it will make it harder for Iran to agree to the final proposal unless the accurate details are released.

Hardliners in Iran are calling it a "poisoned chalice" while Israeli officials are calling it a "historic mistake." President Obama spoke with Saudi Arabia's King Abdullah on the interim agreement and assured him they were going to force Iran to live up to its promises with intrusive monitoring.

Iran is already claiming the deal will open up crude exports to India and China and pour billions into Iran's coffers. I think they are a little premature on those claims. The initial agreement only allows them to export up to 1.0 mbpd and they shipped 750,000 bpd in October. They will have to live up to the letter of the six-month deal before any future crude sanctions will be removed. I am not holding my breath.

Market

All the major indexes closed in record territory on Wednesday with the Nasdaq extending its 13 year high to 4,044. The Dow gained +24 to 16,097 and the S&P +4 to 1,807. The Russell 2000 was again the biggest gainer with a new high at 1,141.

Thanksgiving week is normally positive but rarely by a large amount. It is a transition week from November to the December Santa Claus rally, which normally starts on Black Friday. The next four weeks are typically bullish with 7 of the last 7 and 9 of the last 11 years posting gains.

Jim Brown

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