Inventories Flat, Production Flat

Jim Brown
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The EIA inventory reports this morning failed to energize the markets and energy equities were mixed to fractionally lower. Gas futures did make a new 5-year high before selling off slightly.

Crude inventories rose +1.0 million barrels compared to expectations for a rise of 2.2 million. Crude inventory levels are not the problem as they are right in the middle of the five-year range. There is plenty of crude oil if the demand for refined products were to increase.

Inventories at Cushing declined -1.7 million barrels and this is probably a result of lower inputs as a result of the cold weather and accelerating outputs on the pipeline to the coast. U.S. production was flat at 8.15 mbpd but that should also accelerate once the cold weather is over. Fighting ice, snow and record cold temperatures is a major hindrance to hooking up new wells and keeping existing wells running and pipelines flowing. Oil does not flow well with temperatures in single digits.

Oil imports declined -510,000 bpd to 7.42 mbpd and right at the lowest level since 1991.

Refinery utilization declined slightly from 87.1% to 86.8% and that was probably a result of the cold weather and high inventory levels of gasoline. Distillate inventories are nearing multiyear lows.

Gasoline inventories rose a miniscule +300,000 barrels but gasoline demand declined -300,000 bpd for the week or -2.1 million barrels. We know for a fact this was weather related since hundreds of thousands of commuters stayed home as the storms hit the South and Northeast.

Distillate inventories declined -300,000 barrels and distillate demand declined -60,000 bpd or -420,000 barrels for the week. This is likely a result of the weather as well but I would expect to see it recover over the next several weeks as truckers return to the roads and consumers top off their heating oil tanks ahead of several more weeks of cold weather.

Crude oil prices remained near $103 as the March futures contract expired today. Helping to keep prices higher was unrest in Venezuela where we import more than 1.0 mbpd. Continued unrest and eventual government overthrow there could put those imports in danger.

The violence in the Ukraine is also supporting prices but not because the Ukraine is an oil producing nation. There are worries that Ukraine could be a flash point for a bigger confrontation between Russia, Europe and possibly the USA. The government in Ukraine is supported by Russia but the population wants to be aligned with Europe and not Russia.

There are continued production challenges in Libya, Sudan and Nigeria that are forcing global production estimates lower for Q1 and Q2.

Natural gas inventories declined another -250 Bcf to 1,443 Bcf in storage. Gas in storage is now 40.3% below year ago levels and -34% below the five year average. At the current rate of consumption there is less than six weeks of gas in storage but that should get us to warmer weather. Gas prices rocketed to $6.40 on the news but faded to drop back to near $6 before the close.

I would not hesitate to buy puts on the UNG ETF with an expiration date 2-3 months into the future. Warm weather will arrive, gas demand will decline and gas producers will push as much gas as they can into the system while the prices are high. This is a short term blip and it will fail.


The markets recovered from their Wednesday swoon that came from the hawkish FOMC minutes, increasing violence in Kiev and a warning from the IMF about rising global inflation. Traders bought the dip even though the Philly Fed Manufacturing Survey fell back into contraction territory at -6.3 compared to expectations for a minor drop from +9.4 to +8.0. This is a major decline in an important report suggesting economic weakness was accelerating. However, the "weather ate my numbers" excuse is alive and well and the market ignored the data.

Until the S&P moves over 1,850 on strong volume we are still in danger of a market decline.

Jim Brown

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