Six Month Low

Jim Brown
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Crude prices in the U.S. sank to a six-month closing low at $92.32 on Wednesday thanks to the rising dollar and sharply higher product inventories.

WTI prices have fallen for seven days since touching $100.75 on December 27th. The -$8 drop has been powered by a lot of different factors from rising product inventories, rising dollar, weak economics from China, increasing OPEC production and profit taking from the 2013 year end spike.

The dollar index hit a two month low on the 27th and has risen sharply ever since. The rising dollar weighs on commodity prices but that was just a minor reason for the decline in WTI prices. The biggest reasons have been the rising inventory levels for refined products and the drop in demand over the last several weeks.

Inventory levels fell again last week by -2.7 million barrels. Inventory declines over the last six weeks now totals -33 million barrels. Readers to this newsletter know this decline was due to refiners accelerating production of refined products to avoid having a lot of oil in inventory on December 31st and be forced to pay property taxes on millions of barrels.

However, the vast majority of the investing public is unaware of this fact. They see the rise in refined product inventories and worry that demand has died. Readers only need to look at the gasoline inventory chart below to see that the rise in inventories is normal.

This week's EIA inventories gave them a lot to fear. Distillate inventories rose a whopping +5.8 million barrels after a +5.0 million barrel jump the prior week. Gasoline inventories spiked +6.2 million barrels. To the uneducated investor these are shocking numbers.

Distillate demand declined by -292,000 bpd and production rose +154,000 bpd for a net gain of +446,000 bpd for the week.

Gasoline demand declined -619,000 bpd and imports rose +132,000 bpd while production rose +42,000 bpd for a net gain of +793,000 bpd for the week.

These monster declines in demand came from winter storm Hercules that kept drivers at home and shoppers commuting by Internet instead of vehicle. When the totals for the current week appear in the next report we can expect an even bigger decline.

With nearly 20,000 flights cancelled there will be a huge surplus of jet fuel that will pile up in the distribution channel for a couple weeks until everything gets back to normal.

Crude oil imports only rose +500,000 bpd but there were only three days of January represented. Next week we should see a surge in imports as those tankers circling in the Gulf lined up to offload their cargo in 2014.

Investors seeing the sharp rise in refined product inventories begin to think the economy is slowing rather than winter storms are depressing traffic. Once the cold weather passes and demand returns we should see prices rise.

Cushing inventories rose +1.1 million barrels to 40.7 million.

U.S. production rose to another new high at 8.145 mbpd.

Another train carrying crude oil and propane derailed 20 miles north of the U.S. border in New Brunswick, Canada and caught fire causing nearby homes to be evacuated. Of the 17 cars that derailed two carrying propane and one carrying crude were on fire. The wreck was caused by a broken axle and "undesired brake application." In 2011 around 68,000 carloads of oil were transported by rail in Canada. Between January and September 2013 more than 118,000 carloads had been shipped. After the oil train disaster in 2013 that killed over 30 people the Canadian authorities have required rail companies to notify municipalities when they transport dangerous goods through their communities. This law was passed in November.

The battle over U.S. oil exports is heating up. Senator Lisa Murkowski said she was willing to introduce targeted bills to eliminate the ban on exporting U.S. oil. She said a bigger effort was not needed because the executive branch, President Obama, had the statutory authority to implement various export plans without Congressional approval.

Murkowski should probably do some research on how the export bans came about in the 1970s. Congress was dealing with the Arab oil embargo and rapidly rising gas prices as a result. They wanted to make sure that America was never at the mercy of foreign states in the future.

Exporting U.S. oil is a bad idea. If we exported oil the price of oil would rise to the level of Brent. That would force U.S. refiners to pay significantly higher prices for crude oil and higher gasoline and diesel prices would be the result.

A better idea is for refiners to continue to export excess gasoline and diesel and keep the jobs in America. The refined products sell for more than crude oil so that helps our trade deficit as well.

Proponents of exporting oil claim U.S. refiners are running out of capacity to refine the light sweet crude produced inside the USA. Most of the coastal refiners are structured to process the heavy sour crudes typically imported from overseas for the last 30 years. Refining WTI is easier but it would require billions in capital expenditures to modernize the refineries.

There will not be any new refineries built in the U.S. in the future. They are too expensive, require years of regulatory approvals and must confirm to newer EPA rules. Existing refineries are grandfathered in under the old rules. Over the last decade we have seen several refineries upgraded with capacity additions to compensate for older refineries shutting down. Older refineries have trouble turning a profit because of their older technology. We lost over 1.0 mbpd of capacity over the last five years from refinery shutdowns. This is why the refinery utilization numbers are holding stubbornly over 90% today.

We are at the point where an unexpected refinery outage causes fuel prices to spike in that region. We have seen that happen in California several times in recent months.

Nobody wants a smelly refinery in their backyard so the solution is the continual upgrading of existing facilities to higher capacity levels.

I am against crude oil exports. Despite the abundance of U.S. production today it will not last. Five years from now we should be past the peak of shale production and be back in decline. I would rather use as much oil as possible from outside the country and use theirs up first. Once we do hit peak oil every barrel produced inside the U.S. will be worth significantly more money. Peak oil did not disappear. The shale boom and the drop in demand since the recession have simply delayed the arrival of peak oil. Peak oil is a mathematical certainty that many people fail to understand. It is only a matter of time.

The EIA said this week that oil demand will rise +1.2 mbpd in 2014 and another 1.4 mbpd in 2015. Emerging economies led by China will be responsible for nearly all of that growth. The EIA projects a decline of -500,000 bpd in OPEC production in 2014 as some producers cut back to accommodate the increase in non-OPEC supply growth. In 2015 the EIA expects a supply boost from Iraq and Angola. In 2014 non-OPEC supply growth is expected to be +1.9 mbpd plus another +1.5 mbpd in 2015. Over the same period Syria and Yemen will account for a large portion of non-OPEC supply disruptions.

U.S. fuel consumption is expected to be flat at 18.88 mbpd in 2014. U.S. oil production is expected to grow from 7.5 mbpd to 8.5 mbpd in 2014. They are looking at the average for the entire year since current production is 8.15 mbpd.

To show you how relative the EIA is on their projections they expect natural gas consumption to decline as a result of milder winter temperatures. This report was released today. Have they checked outside recently? Gas production is expected to rise +2.1% in 2014 and +1.3% in 2013.


The market was giving traders indigestion again on Wednesday. With the Dow down over -100 points just prior to the close the Tuesday short squeeze rally was nearly erased. There was a little rebound at the close to end down -68 points. The Nasdaq was positive +12 and the S&P fractionally negative.

This came as the result of earnings warnings and analyst downgrades. The positive ADP news at the open with an estimated +238,000 private jobs added in December was negative for the market. Analysts fear a similar number in the Nonfarm Payrolls on Friday could allow the Fed to accelerate the taper of QE purchases.

This year is not starting off as analysts expected and this will eventually tarnish sentiment and force a larger decline.

Jim Brown

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