Crude Dips on Blockage

Jim Brown
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Crude inventories declined for the first time in eight weeks as a result of the collision in the Houston ship channel.

A barge collided with another ship in the Houston ship channel two weeks ago and the channel was closed for several days to clean up the oil. Inbound tankers were forced to wait in the harbor for the channel to reopen. This delayed the offloading of the oil and forced a -786,000 bpd decline in imports. Obviously this will correct over the next two weeks as those waiting ships are able to unload. It may take two weeks for activity to return to normal.

Crude inventories declined -2.4 million barrels as a result of the import delay and the increase of +223,000 bpd in refinery demand for crude. Refinery utilization unexpectedly jumped +1.7% to 87.7% and the highest in more than two months. The increase was unexpected since this is the time of year when refineries are going offline for maintenance.

Gasoline inventories fell -1.6 million barrels as expected as refiners try to flush out the winter fuel blends before the full scale production of summer blends begins. That was the sixth weekly decline. The decline would have been worse but demand declined by -289,000 bpd. Imports also declined by -95,000 bpd.

Distillate inventories rose +600,000 barrels but still remain abnormally low. Distillates are being exported rather than held in inventory. This is pushing U.S. prices higher but nobody seems to care. We can't export oil but we can export distillates so refiners are running at higher utilizations so they can export the fuel. We export distillates from the Gulf and import distillates on the coasts. Distillate demand actually rose +319,000 bpd. I don't know if the EIA numbers include exports in that demand number or not.

Cushing inventories declined again to the lowest points since the end of 2009. With the new pipelines to the Gulf and the shrinkage of the Brent-WTI spread to just over $5 there is no reason to store oil at Cushing. Refiners can draw down on those cheaper barrels and increase their profits. Railroad shipments are bypassing Cushing and delivering even cheaper Bakken crude directly to the Gulf and to the coasts. Until the Keystone pipeline extension is approved and completed to Canada the inventories at Cushing may continue to be at minimum levels.

Ironically several companies just completed a major storage upgrade at Cushing over the last couple of years on the assumption that the pipelines would fill Cushing to capacity. The increase in railroad shipments has short circuited that plan and now there is about 20 million barrels in capacity at Cushing that is currently unused.

Rebels in eastern Libya currently seeking self rule are preparing to hold talks with the government about reopening oil ports under their control. Libya has the largest oil reserves in Africa and they produce light crude rather than the heavy sour crude produced in the Middle East.

Oil production has fallen to a tenth of capacity after the civil war produced a fractionalized government. The Barqa rebels in control of the ports and some oil fields are demanding a 15% share of national oil revenue for the eastern region. They have tried to export oil on their own but the ships were either turned back or captured by the Libyan navy.

The government may be ready to accept an interim deal because without the oil revenue the company is broke. Current exports of 200,000 bpd are just a drop in the revenue bucket compared to the 1.6 mbpd Libya is capable of producing.

BHP Billiton (BHP) may be considering selling off its noncore assets including aluminum, nickel and bauxite in a $19 billion spinoff. The company said it would simplify operations and allow it to expend more capital on its main businesses. BHP would retain the iron, copper, coal and petroleum assets. BHP is one of the largest offshore exploration companies for oil and gas.

BHP said last March it was going to sell 20 assets as $48 billion in mines and businesses went up for sale globally. For BHP to be considering the spinoff instead it appears the global market for mining assets is a tough sell today with China's economy declining. By doing a spinoff they could package the assets rather than be forced to sell each individually to different entities. BMO Capital Markets believes BHP could sell $10.7 billion in assets and that rises to $20.6 billion if they include their power station coal assets. Royal Bank of Canada believes the aluminum, manganese and nickel assets would be worth about $15 billion. In the past 24 months BHP has sold $5.2 billion in assets.

BHP was forced to write down its U.S. natural gas shale assets in late 2012 by -$2.8 billion. This is a growing trend as the reality of steep depletion curves hits home. Very few shale gas wells are eventually profitable at current prices. Itochu Corp, just took another $279 million charge on the $1.04 billion purchase of shale gas assets from Samson in 2011. KKR and Itochu did the largest LBO in the history of the oil and gas production industry in 2011. The pair bought the onshore oil and gas assets of Samson for $7.2 billion that included more than 10,000 existing wells in the Bakken, Powder River Wyoming, Haynesville Shale and Bossier in Louisiana. They are definitely regretting their decision today.


The Dow closed -3 points below its historic high and the S&P tacked on another 5 points and a new record as it zeros in on the 1,900 target.

Today was a good day and it suggests we are going to continue higher in April. Volume was light but the rally was broad based. There were a lot of small gains that did not appear to be short covering. That suggests investors and traders are positioning ahead of Q1 earnings rather than scalping a couple bucks and heading for the sidelines.

This was the third day that equities rose into the close rather than collapse as we had seen in the prior weeks. That is a positive trend and I hope it continues.

Jim Brown

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