Massive Inventory Decline?

Jim Brown
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The American Petroleum Institute (API) said crude inventories declined -12.0 million barrels last week. However, numerous analysts believe this number is wrong. Estimates were for a decline of -1.25 million barrels. It almost looks like the API put the decimal point in the wrong place.

Analysts at Platts said "it has to be an error because imports and production did not decline. There were no pipeline outages and no refineries experienced a major shutdown. There is no logical explanation for a drop of this magnitude."

The API numbers are not widely reported and the data is submitted voluntarily from refiners, pipeline owners and terminal owners.

The API data was reported Tuesday evening. Futures spiked on the news and everyone held their breath while waiting for the EIA inventory numbers to be released Wednesday morning. When those numbers showed a sharp decline but less than half the API numbers the prices eased slightly to close at $97. That is still a $5 gain over the last three days.

The EIA report showed a -5.6 million barrel decline to 385.8 million barrels. This is the first decline in two months and probably the start of the normal December decline as refiners lighten up on inventories ahead of the December 31st tax day. Refiners are taxed on the oil they have in inventory on 12/31.

There is something strange in the data. The refinery utilization surged a full +3% to 92.4% and a level that is unheard of for this time of year. At the same time refinery inputs of crude rose slightly from 15.55 mbpd to 16.11 mbpd. BUT, product supplied, the output from the refiners, only rose slightly from 19.64 mbpd to 19.97 mbpd.

To break that down refiner inputs only rose +560,000 bpd and refined products only rose +330,000 bpd. So why did crude inventories take such a dive?

FYI, for those that don't know there is an increase in volume called a refinery gain as a result of the refining process. When heavy oil is broken down into its lighter component parts the result is a higher volume quantity. That is how the 16.11 mbpd of crude supplied to refineries ends up being 19.97 mbpd of refined products. Depending on the type of oil being refined the output volume could be up to 25% more than the input.

Distillate inventories rose +2.6 million barrels as a result of demand falling from 4.02 mbpd to 3.55 mbpd, a drop of -474,000 bpd. That was the first gain in distillate inventories since the week of October 13th. That is also a sharp decline in demand given the increased driving activity surrounding the start of the holiday shopping season. Inquiring minds are wondering why.

Gasoline inventories rose +1.8 million barrels for the second consecutive week. That was the first gains in two months. Gasoline demand declined -40,000 bpd and hardly a material change. However gasoline production declined by -443,000 bpd. So how did inventories rise +1.8 million barrels when production declined -3.1 million barrels for the week with imports and demand nearly unchanged?

Analysts were again questioning the refinery production/demand numbers. The usage and supply patterns are not matching up with the inventory levels. It will be interesting to see how this plays out in the next couple of weeks since any misreporting will be corrected in future releases.

TransCanada (TRP) said the lower leg of the Keystone XL pipeline from Cushing to the Gulf Coast will be operational on January 3rd and deliveries to Port Arthur will begin. It had previously been reported it would be operational in late November or early December. Crude has been building up at Cushing in advance of the pipeline opening. It will take a lot of crude to fill the pipeline prior to it becoming operational.

The pipeline from Cushing to Nederland Texas is a 485 mile, 36-inch, crude oil pipeline. The initial capacity will be 700,000 bpd with the potential to transport 830,000 bpd.

As inventory built up in Cushing over the last several months the price of WTI declined relative to Brent. Excess inventory pushes prices lower. Now that there is a firm start date for the pipeline the price of WTI is rising. WTI sold on the Gulf Coast should bring a price closer to Brent, which closed at $112 today. This is a windfall for shale producers able to get their crude to Cushing. They can transport their crude to the coast and receive an additional $15 per barrel at today's prices less the cost of the transportation.

The OPEC meeting is history. As expected the group could not agree on a replacement for Secretary General Abdallah Salem El-Badri. His term had already been extended for an additional year because the group could not agree on a replacement last year. He has agreed to stay another year but it could be a lifetime position because the delegates are no closer to any agreement. It is a case of Iran against Saudi Arabia and they are not likely to agree on anything in the near future.

OPEC ministers did agree to maintain production at 30.0 mbpd. That should make up for current production outages in Nigeria, Libya and Iraq.

Iran said at the meeting they plan on increasing export capability and will be ready to export 4.0 mbpd as soon as the sanctions are lifted. They have not produced 4.0 mbpd since August 2008. Reportedly they are currently exporting 750,000 bpd and the new agreement with the 6 UN nations allows them to export up to 1.0 mbpd. The initial agreement is for six months and the expectations are for a cancellation of the sanctions in six months if Iran upheld its part of the bargain.

Iran said it wanted to meet with XOM, RDSA, BP, ENI and STL in hopes of getting them to invest in Iran once the sanctions are lifted. The Iranian Oil Minister said they would meet with international oil companies in London in March but he did not specifically name them since the sanctions still exist. Iran has claimed reserves of 167 billion barrels and an estimated 1,187 Tcf of gas.

The addition of another 3.0 mbpd to global supply would decimate prices. Iran never obeys the quotas so giving them a quota is an exercise in futility. They will export every barrel they can. This is going to force Saudi Arabia to dramatically lower production to maintain balance and support prices. They are currently producing about 9.5-10.0 mbpd.

Iraq will also begin to export significantly more oil in 2014. They are currently undergoing a major port renovation to expand their export capability. Iraq is on an impossible quest to upgrade its exports to 7-9 mbpd by 2020. They currently export around 2.4 mbpd on a good day. Production is very volatile with pipeline sabotage and bombings a daily occurrence. Their target for 2014 is 3.4 mbpd.


It has been a rough week for the markets. The Dow and S&P finished lower once again and this is the longest losing streak since September. The S&P declined to support at 1,780 and rebounded +12 points to close with a loss of only -2 points. I view this as positive. I wrote on Tuesday night in the Option Investor commentary that 1,790 was a critical level and it closed at 1,793 today.

The Dow dipped to 15,800 intraday and rebounded to close just under 15,900 and a loss of -25 points. This is a critical level for the Dow and it is starting to look shaky for a rebound this week.

The indexes declined because of a stronger than expected ADP Employment report showing a gain of +215,000 jobs compared to estimates for +175,000. This suggests the Nonfarm Payroll report on Friday could also be stronger than expected and push the Fed towards an early taper announcement on QE.

Jim Brown

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