Keystone Pipeline Punted

Jim Brown
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President Obama delayed the decision on the Keystone pipeline until after the elections. I guess that should be no surprise to anyone.

The president does not want to approve the Keystone pipeline because a lot of his big supporters are environmentalists along with a lot of democratic voters. The prior deadline for the $5.4 billion project was early May.

Democratic supporter Tom Steyer has pledged $50 million of his own money to support democratic candidates who will lobby for climate change legislation. He cheered the delay saying it was "rotten eggs for TransCanada and good news on Good Friday for those who oppose Keystone."

Those against the pipeline claim it will stimulate more development of the oil sands and release global warming emissions. What they don't understand or wish to ignore is that the oil sands are going to be developed whether the U.S. gets the oil or not. Canada has said it will build a pipeline to the West Coast and sell the oil to China if the U.S. never approves the pipeline into the US.

Just because the U.S. blocks construction does not mean the oil companies with billions invested in the oil sands are just going to close up shop and go home. It is stupid for protestors to use the argument they are going to block development of the oil sands by blocking the pipeline.

Not only is the pipeline a national security issue and a means to get oil into our pipeline system without having to buy it from 16,000 miles away and ship it to our shores in a method that can be stopped at will but Canada is a friend. The oil from Canada is very close to the same oil we get from Venezuela. Currently Venezuela is our enemy but we import a million barrels a day from them and fund their government with our dollars. I would rather see Canadian oil companies get the money than the Venezuelan government.

By punting the pipeline decision past the election the president has created another political hot potato democratic candidates will have to campaign around. While some of their constituents probably want is stopped there are plenty more with economic common sense that will see past the delay and vote accordingly.

Officials said the reason for the delay was the route squabble in Nebraska. There is a court battle there on which route the pipeline will take. That is not the problem. It will take years to build the pipeline and the route could change several times before construction begins in Nebraska. The route has already been changed twice before. The portions of the pipeline in states other than Nebraska could be constructed while Nebraska makes a final decision.

Libyan oil is back on the market. The tanker Aegean Dignity began loading at the Hariga terminal on April 16th with the load bound for Italy. This is the first oil export from the rebel-controlled ports in nine months. The deal with the rebels was announced just over a week ago and additional tankers are headed for Libyan ports. Prior to the 2011 revolution Libya was producing 1.6 million barrels per day. They are currently producing only 200,000. The storage facilities are full and there is no where to put any additional production until the oil in storage can be offloaded into tankers. Also, many of the oil facilities were damaged in the war and have not been repaired. Without oil sales there is no money to rebuild the infrastructure.

Es Sider, Libya's largest terminal and Ras Lanuf are still closed. The Zueitina terminal is in the process of restarting and the Oil Ministry is lifting the force majeure on that terminal. The Hariga and Zueitina terminals have a combined capacity of 180,000 bpd. The expected slow restart of the oil export process has kept support under Brent crude. It could take months before Libyan production is back over 800,000 bpd. Libyan crude is light sweet crude.

Saudi Arabia boosted exports in February by 3.5% to the highest in five months despite an increase in shipments by Iraq and Iran. Iraq shipped the most oil in 12 years. Saudi shipped 7.76 mbpd. Iranian exports rose +29% to 1.65 mbpd. Iraq, the largest OPEC producer after Saudi Arabia increased exports +26% to 2.8 mbpd. That is the most since 2002. The Joint Organization Data Initiative (JODI) provided the data.

The IEA said OPEC will need to provide 30.6 mbpd during the second half of 2014. That is an increase of 350,000 bpd from the prior monthly forecast. Iraq plans to boost production to 4.0 mbpd by year end. That is more than the prior forecast of 3.4 mbpd by Thamir Ghadhban, an adviser to the prime minister said on February 26th.

Iran is still involved in talks with the P5+1 nations over a permanent nuclear deal but after the Ukrainian situation they are far less likely to give up its nuclear program that is headed towards nuclear weapons.

Ukraine gave up its nuclear weapons when it left the Soviet Union based on a promise of protection by the U.S. and European nations. Obviously that promise was broken. Iran has numerous enemies and it will not follow the Ukraine down that path of allowing other nations to protect it.

The same is true for North Korea. They obviously saw Crimea taken over without a shot being fired in anger and now the Ukraine is in danger of falling under Russia control again.

Iran and North Korea are seeing the U.S. and Europe fail to follow through on protection of European countries and failing to follow through on threats and warnings to Russia. President Putin is making the US and EU look weak and completely ineffective. Iran and North Korea respond only to strong action and ignore weak warnings.

The European and Gulf states see the U.S. as shirking our responsibilities as the global policeman. Saudi Arabia and the Gulf states have depended on the U.S. to keep Iran in check and keep the Strait of Hormuz open for business. A third of the world's oil flows through that strait every day.

Saudi Arabia has already invested millions into nuclear weapons research and could buy weapons from Pakistan at any time. If the six nation talks with Iran breakdown without a permanent solution I would expect to go nuclear. They have to have a credible deterrent against a nuclear Iran.

The world is rapidly turning into a geopolitical quagmire with Iran, Syria, North Korea, Russia, the Baltics, Ukraine, Nigeria, Libya, Argentina, Venezuela all in some form of crisis. Oil prices should remain firm as these countries continue to make headlines.

EIA Inventories

The EIA inventory report for last week was a blowout. The ships queued up to unload in the Houston Ship Channel finally got their turn at the dock and crude inventories rose a whopping 10 million barrels. Crude imports rose by an astounding +959,000 bpd as a result of the backup in the tanker flow.

U.S. crude production rose by +72,000 bpd to 8.301 mbpd and another 25 year high. Cushing inventories declined to 26.8 million barrels and the lowest since Q4-2009. Refinery demand increased by +276,000 bpd as the maintenance cycle is coming to a close and refiners are starting to produce summer blend gasoline.

Inventories in the Gulf Coast reached a record high last week at 207.2 million. That is up from 161.0 million on January 10th. The driver has been the start of the 700,000 bpd TransCanada Marketlink Pipeline south from Cushing to the coast. This could be the start of some pricing pressure once the inventories reach their maximum carrying capacity.

Gasoline inventories declined by a minor -200,000 barrels. Gasoline demand and production numbers have been skewed for the last couple of weeks as a result of numerical errors. I would expect to see them corrected by next week. For instance gasoline demand supposedly declined by -431,000 bpd and production declined by -380,000 bpd. That is improbable given the negligible decline in inventories and the spike in demand for crude oil of +276,000 bpd.

Distillate inventories declined -1.3 million barrels as a result of a +238,000 bpd increase in demand. Distillate imports declined -60,000 bpd.

Refining utilization rose sharply from 87.5% to 88.8% and nearing summer levels over 90%. With the shutdown of multiple refineries over the last several years the remaining refineries have to maximize production to avoid product shortages.

Baker Hughes said the number of active oil rigs was flat last week at 1,831. Gas rigs actually gained from the 19 year low the prior week. Oil rigs declined by -7 from the 24 year high the prior week.

Natural Gas Storage

The 11 year low in natural gas in storage will eventually pull some oil rigs back to the gas fields. There was an injection of 24 Bcf into storage last week but that was less than the 50 Bcf expected and gas prices rocketed higher by 20 cents to $4.75.

Inventories are 54% below the five-year average and will require a year of record production to return inventory levels to normal levels before next winter. Analysts believe November 2014 inventory levels could be the lowest since 2008. The EIA only expects injections of 2.6 Tcf by the end of October to raise storage levels to 3.422 Tcf and the lowest since 2008. Injections would have to be 25% above the five year average to lift storage to the 4 Tcf level where it is needed. That is not likely to happen.

Last month was the coldest March since 2002. January gas demand at 104 Bcf per day was a record. Historically gas prices decline -19% from January to early April. Gas prices are refusing to fall thanks to the continuing cold weather in the northeast and the low amounts in storage.

The EIA said gas production could rise as little as 3% in 2014 from the record production of 72.29 Bcf per day in 2013 and most of that will come from the Marcellus.

Frac Sand Explosion

Frac sand is becoming a major cargo for the railroads. In 2007 only 4.9 million tons were delivered in the U.S. normally using only a few hopper cars on a regular freight train. In 2012 they shipped 20.9 million tons. Today the sand companies are using entire trains of 100 hopper cars to ship sand to the major shale areas. Everybody has seen the 100 car coal trains and the 100 car sand trains are now becoming more frequent.

Companies like Emerge Energy Services, U.S. Silica (SLCA) and Hi-crush Partners (HCLP) are building railroad loading terminals at the mines and offloading terminals in the shale fields. Union Pacific and BNSF are the two railroads benefitting the most from the frac sand explosion. Union Pacific and U.S. Silca are building a storage facility in Odessa Texas that can handle two 100 car trains at the same time. Emerge is working towards loading (20) 100-car trains a month. A ton of sand costs $50 at the mine and $130 at the drilling area.

Add in the trains with carloads of drill pipe and the frac boom has injected new life into the railroads. Union Pacific hauled 200,000 carloads of sand in 2013, up 26% from 2012.


The markets posted some decent gains last week but they may have run out of gas. The Nasdaq and Russell 2000 gains on Friday were lackluster and failed right at downtrend resistance. The Dow ended the day with a loss and well off its highs.

Earnings are going to be the key for this week but by next weekend there will be a lack of excitement after all the big companies have reported.

There is a significant risk to the market in the coming weeks. I would be cautious about buying any bounce and look for a return of the April weakness.

Jim Brown

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