Inventory Shocker

Jim Brown
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Crude inventories were supposed to rise last week as 2014 deliveries stacked up at ports until after the December 31st tax deadline passed. What we saw from the EIA today was a major shock to the market.

Instead of a large gain in inventories as a result of those delayed deliveries we got a monster decline of -7.7 million barrels. Analysts were scratching their heads trying to figure out what happened because refinery utilization fell a whopping -2.3% to 90.0% and that should have left more oil in inventory.

First, the crude oil imports fell from 7.96 mbpd to 6.89 mbpd and that accounted for a decline of -7.49 million barrels alone. The spike in gasoline inventories of 6.2 million barrels means refiners used even more oil last week even though the utilization rate declined.

I think we have to question these numbers. To have imports decline -7.49 million barrels in what is normally one of the strongest weeks of the year suggests there were some abnormalities in process somewhere. Also, to have gasoline inventories spike by an identical 6.2 million barrels two weeks in a row also suggests a hiccup in the accounting process.

Distillates declined -1.0 million barrels thanks to a sharp rise of +704,000 bpd in demand. Personally I think that number is wrong also. Distillate demand averages about 3.5 mbpd and it was the lowest in months at 3.02 mbpd the prior week. For it to jump +23% in a week to 3.72 mbpd suggests some miscounting the prior week. However, with the winter storms and monster airline outages I am sure the diesel and jet fuel supply situation is pretty crazy this year. Distillate production fell -370,000 bpd.

Over the last seven weeks crude inventories have declined -41.4 million barrels to a 22 month low. At the same time oil demand is up +4.2% over the same period in 2013. Whether this is temporary or will continue to increase is the real question.

The price of oil had been declining on chances from increased supply from Iran and Libya plus the constantly rising U.S. production. The sudden unexpected decline in crude today helped power a short squeeze that began on Tuesday. The $91.50 level had halted the decline last Thursday and after three days of holding right at the $92 level the shorts capitulated after the inventory numbers today.

The cold weather has caused a rebound in natural gas prices to $4.33 ahead of what could be a record withdrawal from storage when the inventory numbers are released on Thursday. With the majority of the nation facing another big cold front this week the levels of gas in storage could reach abnormal lows before the end of winter. Last week inventory levels were -15.8% below 2013 levels and -10.1% below their five-year levels.

Last week there was 2,817 Bcf of gas in storage with normal consumption of 20 Bcf per day more than production. That means storage levels should decline about -100-120 Bcf a week. Three weeks ago we saw a -285 Bcf draw for one week. If the cold fronts continue to stack up on us we could fall under 1,000 Bcf in storage very quickly.

Propane inventories declined -3.8 million barrels last week to 38.654 million barrels in storage. That was roughly a 10% decline with three months of winter remaining. This is a huge draw and it is expected to be duplicated again in this week's report. Inventories are well under the five-year average and 25.3 million barrels or -39.6% lower than 2013 levels. Propane prices rose to $2.84 per gallon and 58 cents higher than the same period in January 2013.

Iran and the P5+1 agreed to the final terms of the deal last week and Iran's president wasted little time in broadcasting his "victory" over Americans. Hassan Rouhani tweeted on Tuesday "Our relationship with the world is based on Iranian national interests. In the Geneva agreement the world powers surrendered to the will of the Iranian nation." The tweet was deleted on Wednesday after U.S. officials denied reports of a secret side deal with Tehran over the nuclear agreement.

The declaration of western "surrender" was delivered against a backdrop of rising congressional pressure for additional sanctions. It was an in your face "gotcha" now that congressional action was off the table. More than 58 Senators have already signed onto a bill for tougher sanctions.

In Tehran on Friday the Ayatollah warned everyone again that despite the agreement in Geneva that America was still the enemy.

Iran may be fresh from the Geneva win but they already are hitting the delay button. Iran and the IAEA were scheduled to meet on January 21st, a day after the Geneva agreement takes effect, but Iran said it was postponing the meeting until February 8th. Clearly talk is cheap and follow through is nonexistent.

Whitehouse spokesman Jay Carney told reporters asking about the tweet, "It doesn't matter what they say. It matters what they do." Does arbitrarily cancelling the first meeting after the agreement send the west a message? Absolutely. I think the potential for dropping all the sanctions after the interim 6 month agreement is pretty slim. I seriously doubt Iran will follow through with their requirements under the agreement and will try to delay any future agreement. Rouhani was previously a nuclear negotiator with the P5+1 nations and he has bragged numerous times about how long he delayed sanctions and inspections while Iran was escalating their nuclear capabilities. Why is today any different?


Another rally but still no conviction. The S&P closed at a new high by a fraction of a point but remains stuck under strong resistance at 1,850. The Nasdaq and Russell 2000 surged to new highs well over their prior closes. Unfortunately the Dow rose to 16,500 and came to a dead stop. The Dow tacked on +108 points but remains negative for the year.

I would be wary of adding to any long plays unless you are buying them on the dip. Wait until the S&P moves over 1,850 before chasing prices higher.

Jim Brown

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