Inventory Adjustment Continues

Jim Brown
 
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Crude inventories declined again for the fourth consecutive week. This was for the week ended on Dec 20th so we still have at least one more week of declines before the rebound begins in January.

As I have said before the declines in inventory levels are to reduce the property tax bills that come due on oil held on December 31st. Refinery utilization spiked +1.2% to a Q4 high of 92.7% as refiners attempted to push as much oil through the system as possible in the few days they have left.

Crude inventories declined -4.7 million barrels making it a -23.8 million barrel decline in just the last four weeks. We could see another -5 mb decline this week if the holidays did not disrupt the refiner work schedules.

Distillates declined -1.8 million barrels to remain pretty much in line with the historical patterns. Inventories are only about 4.4% below year ago levels. Demand declined -82,000 bpd an imports dell -51,000 bpd.

Gasoline inventories declined -600,000 barrels but the internal components did not substantiate that headline number. Imports declined -113,000 bpd and demand increased +160,000 bpd. At the same time production rose +404,000 bpd. In theory gasoline inventories should have risen given those component numbers. The details will probably flush through the system next week and correct the overall numbers. Gasoline inventories are only -1.5% below year ago levels.

Refiner inputs rose to 16.23 mbpd and the highest level in months. Refined products supplied to the market declined slightly from 20.99 mbpd to 20.48 mbpd. However, this should also be self ocrrecting next week with higher product supply numbers.

U.S. oil demand is 5.3% higher than the same time last year. This runs contrary to the shopper tracking surveys showing store traffic was down sharply from year ago levels. It would appear people were driving more and shopping less but that does not make sense.

Employment has not risen enough to account for the 5% rise in demand. As employment increases so will gasoline demand but we are not yet seeing that dynamic.





Market

The yearend market momentum faded after Christmas and we could be setting up for some profit taking this week. New Years Eve is normally negative as traders close all positions to enter the new tax year with a clean slate.

Q4 earnings could be a challenge as the 10:1 imbalance in guidance warnings over positive guidance suggests. Eventually fundamentals will matter again and not the amount of Fed purchases. For the time being those purchases are on track to total $650 billion in 2014 so plenty of fuel left in the tank.

The first week of January is normally bullish as a result of new retirement contributions hitting the fund accounts. Yearend bonuses will also be put to work. After the first week of January I would be concerned we could see some profit taking.

Because of New Years on Wednesday there will be no midweek update this week.

Happy New Year!

Jim Brown

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