New 25 Year High

Jim Brown
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Crude oil production in the U.S. rose to 8.182 Mbpd last week and that was the highest level of production since 1989. That is up from 7.9 mbpd in December.

In 2013 crude production averaged 7.5 mbpd and 967,000 bpd more than 2012. Production increased +15% in 2013 and that was the largest percentage increase since 1940. Texas and North Dakota accounted for 83% of that production growth. Production in the Eagle Ford reached 1.22 mbpd in December and the Bakken reached 1.0 mbpd in November. Production from the Bakken, Niobrara, Permian and Eagle Ford to increase a combined +66,000 bpd in April.

Production did not increase in all states. There were seven states and the Gulf of Mexico where production fell. Production in the Gulf declined -2% and Alaska also fell -2%. Imports have declined to just over 7.3 mbpd and the lowest level since 1996. The recent peak was 10.7 mbpd in 2005. We are now producing nearly 1.0 mbpd more than we import and that spread is widening.

The EIA expects U.S. production to average 8.4 mbpd in 2014 and rise to 9.2 mbpd in 2015. The historical peak was 9.6 mbpd in 1970. The EIA expectd Gulf production to rise sharply over the coming years as a result of the large amount of activity over the last 5 years. Numerous new projects are coming online with large flows expected. There are 8 new projects coming online in 2014 and 10 more in 2015. The EIA expects production to rise +140,000 bpd in 2014 and +210,000 bpd in 2015.

It looks like the accounting caught up with the inventory reporting this week. Crude oil inventories spiked +6.2 million barrels for the 8th consecutive week of gains. This is the period where oil inventories rise but not by six million barrels a week. I suspect this was the result of backed up deliveries in Houston as a result of the recent fog in the ship channel or the accountants finally caught up with the reporting to the EIA. Sometimes inventory reports to the EIA are delayed and the EIA tries to estimate the numbers. When the reporting catches up the adjustments are made to the current week.

Refinery demand fell by -225,000 bpd and imports rose only +199,000 bpd. U.S. crude production rose by +105,000 bpd thanks to the warmer weather. If we add those three numbers together to get the total impact to crude supplies we get +529,000 bpd. Demand falling -225,000 is equal to a +225,000 positive impact to inventories. Multiplying 529,000 * 7 days = 3.7 million barrels and inventories rose by 6.2 million. Obviously there was something in the accounting that is not reported.

Cushing inventories fell to another low at 30.8 million barrels. That is the lowest level since February 2012.

Gasoline inventories dropped sharply by -5.2 million barrels. A sharp increase in demand of +538,000 bpd was offset by a production increase of +320,000 bpd and a rise in imports of +65,000 bpd. Gasoline inventories should be declining as we approach the end of the winter blends selling season. Refiners and wholesalers are trying to let inventories of winter blends deplete before the summer blends are required.

Refiners are heading into their maintenance season where they shut down for maintenance and conversion to the summer blend refining process. Gasoline inventories should continue to decline.

Distillate inventories fell -500,000 barrels due mostly to a drop of -138,000 bpd in imports. However, demand did increase +151,000 bpd.

It would appear from the overall numbers that America is waking from its winter slumber and demand numbers for refined products should begin to climb once the winter weather fades. Once warmer weather arrives the demand of oil for asphalt will rise sharply followed by the higher demand for the summer driving season.

Propane inventories declined -1.1 million barrels to 26.1 million. That is down -16.9 million from the same week in 2013. A new study out today showed that homes heated with propane have paid 65% more this winter than in 2012. Analysts are now predicting this will be the coldest March in decades but warm weather will follow in April. Propane supplies are no longer in danger of becoming depleted and prices have declined almost $1 from their highs.

If you have not picked up a few puts on UNG, the natural gas ETF, your time is running out. Support is holding at $4.50 on nat gas but warm weather is just around the corner. When this next cold front passes we should see nat gas crash back to $4 or even $3.50 before the summer demand cycle begins.


Today we may have seen the low for this market dip. At least I hope it was the low. All the major averages except for the Dow rebounded from the opening drop to close positive. The Dow rebounded +80 points but still finished the day with a loss of -11 points.

All the indexes closed on their highs for the day compared to closing on the lows since March 5th. This should be a good sign but we will still be controlled by headlines from the Ukraine if the situation worsens. The Ukraine president said he will not use military force to eject the Russians from Crimea because Russia has amassed a large number of tanks on the Ukraine border as a threat not to intervene in Crimea. That would give Russia a reason to invade the rest of the Ukraine. At this point it appears the Crimean annexation is nearly complete. Sanctions against Russia will begin next week.

Jim Brown

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