Inventories Depress Prices

Jim Brown
 
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Crude prices declined to $98.75 on Thursday after another inventory gain pushed crude levels to another record.

Crude inventories rose +1.7 million barrels to 399.4 million and the highest since the EIA began keeping weekly records in 1982. On a monthly basis that record stretches back to 1931. Analysts expect crude inventories to rise for several more weeks before refiners begin their full production for summer gasoline demand. Investors, especially the low information retail traders, hear "record highs" and suddenly they decide to sell.

Crude prices normally rise into the summer so any dip over the next couple weeks would be a buying opportunity.

Inventories at Cushing fell to 25.4 million barrels and another multi-year low. Takeaway capacity continues to exceed incoming volumes. The EIA said receipts of domestic crude at East Coast refiners were approximately equal to receipts of foreign crude in January. This was significantly different than the 18% of the total in January 2013 and only 5% in January 2012. This is a clear explanation why Cushing inventories are shrinking. Producers are shipping significantly more crude by rail directly to refiners on the coasts than by pipeline to Cushing.

Bakken crude is a good fit for East Coast refiners, which normally import light, sweet crude. As additional rail terminals are constructed in the Bakken and the Niobrara we can expect further reduction in the import of waterborne crude.

The cost of Bakken crude including the cost of transportation to East Coast refiners averaged $8 below the cost of imported crude at the end of 2013. This is a significant incentive for refiners to increase their use of Bakken crude. Multiple rail receiving terminals are being built in the northeast to increase the amount of crude available to refiners.

The EIA said crude by rail receipts in the East Coast averaged less than 80,000 bpd in 2012. That rose to 290,000 bpd in early 2013 and to nearly 490,000 bpd in January 2014. Imports of crude in the northeast have declined from 1.1 mbpd in 2012 to 775,000 bpd in 2013 and just 524,000 bpd in January 2014.

Refinery utilization was unchanged at 91% and very strong for this time of year. The same week in 2013 saw only 84% utilization. High gasoline prices are fueling the urge to produce at a high rate. Secondly, refiners are starting to produce their summer blends now that the winter blends have been depleted.

Gasoline inventories rose for the first time in eight weeks with a +1.6 million barrel build. This is the starter's gun for the summer refining surge. We should expect utilization to remain over 90% for the next several months.

Distillate inventories rose +1.9 million barrels but remained below the five-year average. Exports of refined products continue to be high with 3.0 million bpd last week. That was 399,000 bpd of gasoline, 122,000 bpd kerosene, 901,000 bpd of distillate fuel oil (diesel), 391,000 bpd of residual fuel oil, 314,000 bpd of propane/propylene and 877,000 bpd of "other" distillates.





The EIA reported a 15% increase in proven oil reserves in the U.S. to 33 billion barrels. If the stacked reserves in places like the Bakken continue to prove commercially successful that number is going to move substantially higher.

Natural gas inventories rose 82 Bcf last week and well over expectations for a 52 Bcf injection. The 82 Bcf was 30% above the five-year average for last week. However, rising demand in the south as a result of sharply rising temperatures forcing early air conditioner use, may have kept the injection from being even higher.

The price of gas declined about 20 cents to $4.67 but that is still well above the average for this time of year. Gas inventories are more than 1 trillion cubic feet below where they need to be. At only 981 Bcf this would require more than 3 Tcf (3,000 Bcf) of injections between now and November 1st to have enough gas to last through the winter. With only 27 weeks left before November that would require an injection of 112 Bcf per week on average for the rest of the summer. That is not likely to happen once the summer heat increases demand. The average weekly summer injection is well below 100 Bcf. In July and August it is not unusual to see injections under 50 Bcf. This suggests there will be a shortage of gas next winter and prices are going to rise.


We can only imagine where the country would be were it not for the shale gas revolution that began in 2007. Up until 2007 and the advent of horizontal drilling and high pressure fracking natural gas production in the U.S. had peaked. The gas reserves that could be reached with a vertical well were exhausted.

Starting in 2007 shale gas production exploded from about 4 Bcf a month to about 32 Bcf today. Gas prices declined from $15 to $2 from 2005 to 2012. The country has shifted to consuming more natural gas but gas drilling has slowed. If it does not pickup again soon the price of gas is going to rocket higher. It has to rise to force producers to focus on gas or we are going to be in trouble in the coming years.



Market

Russia did not invade Ukraine but it is not over yet. Futures opened positive but quickly returned to the flat line as Monday's headlines overseas focused on more protests and demonstrations.

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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