What Goes Up, Always Comes Down

Jim Brown
 
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Crude prices collapsed over the last two days as initial tensions in the Ukraine have faded. WTI rallied to $105.22 on Monday before collapsing back to $100.95 today.

Ukraine's interim Prime Minister Arseniy Yatsenyuk said he had contacted Russian leaders in an attempt to resolve the crisis in the ex-Soviet state. He said the talks had been rather timid but the first steps had been made. He also said the Ukraine government will sign a trade deal with the EU that the ousted president Yanukovych had rejected in November in favor of closer ties with Moscow. That decision led to three months of protests and nearly 100 dead and his eventual exile to Russia.

The news of initial talks with Russian officials seemed to indicate the potential for fighting was declining every day. The prime minister also asked Russia if they were going to follow through on their commitments to a $15 billion loan with the next tranche of $2 billion due almost immediately. There have been comments out of Russia suggesting the loan was on hold.

The Russian state owned energy giant Gazprom had promised to slash gas prices to the Ukraine by one third as a benefit of rejecting the EU trade deal over closer ties to Russia. Now that Ukraine has said it will sign the EU trade deal Gazprom has revoked the discount effective April 1st. Gazprom claims the Ukraine owes it $1.55 billion for unpaid gas.

Putin routinely uses the gas Russia supplies to Europe as a bargaining chip in various negotiations and when he does not get his way the price normally goes up.

The resolution of the Ukraine situation will not come in the near future. Since Putin has total control of Crimea the long term resolution will likely be some sort of annexation. Russia needs the Crimea because that is their only warm water port. They have a lease on the port until 2042 but now that Putin has control of Crimea again I seriously doubt he will let it go.

Remember the incursion into Georgia several years ago to "protect Russian citizens." Russian troops are still there and everyone has forgotten Putin put that state back into his portfolio. I expect Crimea to again become part of Russia in some form.


The weekly EIA oil inventory report showed a gain of +1.4 million barrels of crude. That is the seventh consecutive weekly gain. This is not unusual. Oil supplies normally go up from late February to mid June as refiners slow production for maintenance reasons and at the same time build up supplies of crude to turn into gasoline for the summer driving season.

It was a pretty quiet week with imports rising only 75,000 bpd and U.S. production rising only 18,000 bpd. Refinery demand for crude declined -87,000 bpd. Total refined products supplied to the market rose only 10,000 bpd to 18.29 mbpd. That is not even big enough for a rounding error.

Crude supplies at Cushing fell sharply by -2.7 million barrels to the lowest level since February 2012. Pipelines are taking more crude south to the Gulf refineries but I believe the cold weather has been impacting crude flows into Cushing and they will pick up as the weather improves. The spread between Brent and WTI has narrowed to $7 and there is less incentive for refiners to import oil rather than use the WTI delivered by pipeline.

Distillate inventories rose by +1.4 million barrels as another wave of airline cancellations caused a backup in jet fuel supplies. Home owners are probably putting off on adding heating oil with only three weeks left in winter. At least they hope there are only three weeks left. You may remember the spring of 2012 when winter weather hung around until April. Let's hope that does not happen again. Distillate imports rose +89,000 bpd.

Gasoline supplies declined -1.6 million barrels despite a rise in production of 344,000 bpd. Imports rose by 54,000 bpd but demand declined -124,000 bpd. This is the time of year when refiners slow production of winter blend gasoline. They need supplies in the system to be depleted by the time they ramp up production of summer blends. We should expect to see gasoline inventories decline into late May.





As a sign that consumers are expecting warmer weather the supplies of Propane rose for the first time this season from 26.68 million barrels to 27.16 million. That is a clear indication that despite the severe cold last week consumers are going to try and wait out the prices and refill in the spring and summer after prices return to normal. Propane demand has fallen dramatically over the last four weeks with a -27% drop from 1.746 mbpd to 1.269 mbpd. Having prices rise from $2.65 a gallon to over $4 meant a lot of homeowners had to put off or reduce purchases and turn down the thermostat. That was a 51% increase at the consumer level and very painful for cash strapped homeowners.



Chevron (CVX) won a crucial victory in a New York court over a $18 billion judgment against the company in Ecuador. The claim began after Chevron acquired Texaco. Sometime prior to 1992 Texaco reportedly polluted a site in Ecuador. Texaco eventually cleaned up the site and received a letter from regulators removing Texaco from all liability. The site was turned over to the state owned oil company. Fifteen years later a New York attorney, Steven Donziger, prosecuted a "Robin Hood" case against Chevron for the original pollution. The case was tried in a one horse town in Ecuador and the judge was bribed, the testimony faked and witnesses paid off to give false testimony. Everyone was promised a piece of the pie if Chevron was found guilty. The judge rendered a $18 billion verdict against Chevron and everyone in the process thought they had won the lotto. Chevron continued to appeal all the way through the Ecuador Supreme Court but lost in every case because of the carefully constructed false testimony and bribed witnesses. Also, Ecuador was drooling over the potential for an $18 billion windfall. Ecuador tried to seize Chevron assets in Canada, Argentina and Brazil.

Fast forward ten years and Chevron had Donziger brought up on racketeering charges in New York. Using the RICO statutes they pressured their case and presented numerous witnesses who claimed they lied in the original trial, presented evidence the judge was corrupt and the Donziger team had covertly provided him with all the case materials, judgments, precedents, etc with a promise of a big payday. The New York judge ruled against Donziger saying the team used "bribery, fraud and extortion" in getting the original verdict. Now Chevron can use the New York case in "any court that respects the rule of law to find the Ecuador judgment to be illegal and unenforceable" according to Chevron. Ecuador saw the writing on the wall in late 2012 and reduced the judgment to $9 billion in an effort to get Chevron to settle. Now they will get nothing. Chevron shares have been beaten up multiple times over the last several years as these cases wound their way through the courts with that $18 billion liability hanging over their head.

I received several emails from readers this week on the uranium article from Sunday. They were asking what stocks to buy to benefit from the coming uranium boom. Most readers of this newsletter don't realize this is just one of the two OilSlick newsletters produced each week. The second newsletter, also published on Wednesday and Sunday, has dozens of stock recommendations to benefit from energy trends and current events like the coming uranium spike. Click the banner below to subscribe to the Energy Plays newsletter.

Market

The markets rebounded strongly on Tuesday and that excess was bled off today. The Dow lost -35 points while the S&P was flat. The Nasdaq posted a minor gain of 6 points. The ADP Employment report came in with a gain of +139,000 jobs compared to estimates of +175,000 jobs. The weather received the blame. This big miss caused analysts to revise their estimates even lower for the Nonfarm Payrolls on Friday. The worry over what could be an ugly Nonfarm report weighed on the market.

The ISM Nonmanufacturing Index was also a disappointment. The headline number fell from 54.0 to 51.6 and well below estimates for 53.1. The weather was blamed once again.

If we get to April and the weather has improved and the numbers remain low the market is going to struggle finding another reason to rally. Until then the weather will remain the convenient excuse.

The market "should" drift higher but nothing is ever for certain.

Jim Brown

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