New Record High

Jim Brown
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Crude inventories reached the highest weekly level since the EIA began tracking in 1982.

Crude inventories rose +3.5 million barrels to 397.7 million and a new record high. The previous weekly high was 397.552 million on May 24th, 2013. Prior to that the EIA recorded data on a monthly basis and they said it was the highest on a monthly basis since May 1931. Inventories have increased 13 of the last 14 weeks.

U.S. crude production rose to 8.36 mbpd and the highest level since 1988. Meanwhile oil demand declined -361,000 bpd and the lowest level since June 7th. With more oil flowing straight to the refineries from the shale fields and tensions rising over the situation in the Ukraine analysts are expecting inventories to continue to rise.

Refiners normally stock up on oil in the spring to have plenty on hand for the demand for gasoline during the summer driving season. The rise to record inventory levels and the drop in demand caused a -$4 decline in crude prices to just over $100. This is probably temporary. The sharp decline in equities probably contributed to the decline in crude.

Refinery utilization rose unexpectedly from 88.8% to 91% well ahead of the normal move over 90% later this spring. Apparently operators are finishing the refinery maintenance cycle early this year.

Gasoline prices have risen sharply to $3.68 on average and this is allowing refiners to maximize profitability. The crack spread has risen from $2 a barrel in January to more than $18 today. This suggests the spike in refinery utilization is an attempt to capture this huge profit margin while they can.

Crude imports declined -475,000 bpd from the artificially inflated numbers the week before when imports through the Houston ship channel spiked after it was reopened.

Inventories at Cushing declined from 26.8 million to 26.0 million barrels. And the lowest level since Q4-2009. Producers are choosing to ship direct to the refiners by rail rather than pipeline it to Cushing. The incoming pipelines are still running near capacity but there is more outflow capacity than there was just a year ago with two southbound pipelines now operating.

Distillate inventories rose +600,000 barrels compared to expectations for a decline. Distillate inventories are near a 52-week low at 112.5 million barrels and are -2.4% below year ago levels. Distillate imports declined by -163,000 bpd.

Gasoline inventories declined -300,000 barrels for the 9th consecutive week. Refiners and pipeline managers are still trying to flush the winter blends out of the system before they load up on summer blends. Gasoline imports declined by -84,000 bpd.

Spring has sprung and oil wells are growing like weeds. Baker Hughes said active rigs spiked +30 last week to 1,861. Oil wells rose +24 to 1,534. That is another 25 year high. Active gas rigs rose +7 to 323 after hitting a 19 year low of 310 two weeks ago.

Most of the energy stocks reporting earnings last week blamed their misses on the severe winter weather that slowed fracking and completions and delayed drilling efforts. Now that the ultra cold weather is over companies are taking advantage of the milder temperatures to accelerate drilling.

Carbo Ceramics said the heavy snow and cold caused the railroad system to backup and delayed delivery of frac sand and drill pipe to needed locations. Water used to frac the wells froze and complicated the fracking process.

Natural gas prices declined slightly on Thursday and Friday after a larger than expected injection into storage of 49 Bcf. If the injection rate continues to improve that price should continue to decline. After hitting an 8-week high of $4.79 on Thursday it closed at $4.64 on Friday. I still expect to see active gas rigs grow now that gas prices have stabilized at a higher level.

The EIA said last week that production in the Marcellus shale continues to exceed the takeaway capacity of the pipelines. The EIA said there are still more than 1,300 gas wells that have been drilled but not completed. There are several new pipeline projects under construction and several have recently been completed but connection to the gathering system will need to be completed before drillers will complete the wells. Transco announced on the 17th of April it had entered into delivery contracts for .44 Bcf/d under its Dalton expansion project. The Dalton project sends gas south from New Jersey to Georgia on the Transco mainline. That line currently has a peak capacity of 9.8 Bcf/d and carried as much as 2.8 Bcf/d of Marcellus gas to the Northeast this winter.

Mexican oil production is continuing to decline despite new efforts by Pemex to boost production. Mexico is producing 2.5 mbpd and the lowest level since 1995 according to the EIA. This is impacting the welfare of the Mexican state since oil revenues fund the majority of the government's budget.

Mexico is thought to have an estimated 10 billion barrels of proven oil reserves. However, the country is a major importer of refined products. In 2013 they imported 44% of their gasoline from the USA.


The equity markets are at a point where a direction should appear. After trading more or less flat for the last six weeks investors will have to decide if they are going to sell in May or buy the dip for a summer rally.

Right now the charts are suggesting further weakness and it could be a rocky summer. While nobody can accurately determine future market direction on any given day the charts and internals are looking weaker.

I would refrain from adding to long positions until the S&P moves over 1,900. I would look to add to short positions on a failure in the 1,885-1,890 range like we had last week.

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Jim Brown

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