Green is Good, Sometimes

Jim Brown
 
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Governments around the world are turning green with everyone passing more laws to try and force a reduction in green house gases. Unfortunately some of them have unintended consequences.

Australia just repealed its carbon tax billed because it was crushing the economy. Green is good until the economy withers under the new laws. The Australian carbon tax raised electricity costs for families by $550 a year, which does not seem like much, but it caused an estimated $15 billion in economic impact to the Australian economy in the first two years of operation.

The new Australian Prime Minister, Tony Abbott, said Friday, "Today, the tax that you voted to get rid of is finally gone. A useless, destructive tax which damaged jobs, hurt families and did not actually help the environment is finally gone."

Countries in Europe, normally leaders in the green movement, are pushing back against onerous carbon legislation and renewable mandates that exacerbate energy inequality, raise electricity costs and reduce economic growth, according to Peabody Energy's CEO Gregory Boyce.

Peabody wrote an open letter to the current U.S. administration and lawmakers saying they can learn "a valuable lesson in rejecting defacto carbon taxes and onerous renewable standards. The U.S. Chamber of Commerce estimates that the Administration's proposed carbon regulations could cost the U.S. economy $50 billion a year.

Peabody said, "The proposed rules would significantly increase power prices, costing each American household thousands of dollars over time. A Heritage Foundation study reports the cost to an average family of four at $1,200 per year of lower income and spending power. Low-cost electricity is essential at a time when a record 115 million Americans qualify for energy assistance and 48 million live in energy poverty."

The president has already pushed miles per gallon standards for cars into unreasonable levels and by 2020 you will be lucky to own a car that will go 65 mph.

Technology is the answer to the emissions problem. Technology improvements are moving faster than anyone could have imagined just ten years ago. The government should forget passing expensive and cumbersome regulations that could cause unintended consequences like another recession. Instead reward companies with incentives to improve technology and give them benchmarks to hit to achieve those rewards. American ingenuity is a powerful thing. With the right incentives nothing is impossible.

Iran

Iran won another round with a successful rope-a-dope play against the P5+1 countries. Iran continues to win by postponing any decision. The six nations agreed to give Iran four additional months to reach a permanent agreement and they gave them another $2.8 billion in formerly frozen assets. In return Iran said they would do what they promised in the initial agreement and never followed through on. That is eliminating their supply of 20% enriched uranium and not installing any new centrifuges in their enrichment centers.

The delay was justified by the six nations saying it was better to delay another four months than have a bad agreement. I am sure Iranian negotiators are celebrating again this weekend.

I am afraid the six nations, led by the U.S., just don't get it. As long as the keep agreeing to Iran's demands and postponing the addition of new sanctions they will never reach a permanent agreement. Iran is winning the nuclear war one postponement at a time.

Oil Inventories

The accountants finally caught up with the supply-demand equation for July and oil inventories plunged last week. We know demand surged over the July 4th weekend but the inventory numbers had been slow to reflect that increased demand. That ended last week.

Crude inventories declined -7.5 million barrels while the actual underlying metrics barely changed. Refiner inputs, the number of barrels used by refiners, rose from 16.25 mbpd to 16.43 mbpd or roughly +380,000 bpd. That is a decent surge but hardly a contributory to a -7.5 million barrel drop.

Imports rose from 7.29 mbpd to 7.43 mbpd, a +131,000 bpd increase. U.S. production rose from 8.51 mbpd to 8.59 mbpd, a +80,000 bpd gain.

That means incoming oil totaled +211,000 bpd while refiners used +380,000 bpd more or a net decrease in inventory of only -169,000 bpd or only 1.183 million barrels for the week.

So how did inventories decline -7.5 million barrels when we only used 1.183 million barrels of oil more than the prior week? The answer is the inventories did not decline. The accounting caught up.

The inventory reports are submitted weekly by the various refiners, storage operators and pipeline companies. Sometimes for various reasons the reports are not sent by all the companies. The EIA tries to estimate the changes for the reports they don't receive. Also, oil is a constantly moving product. Keeping track of the movement of 17 mbpd of oil is a complicated process. For a pipeline operator new oil comes in and old oil goes out. For a storage facility multiple oil grades comes in and is blended together to reach a certain consistency and then sent out. For refiners they can receive a couple million barrels a day to be shuttled between their various tanks and processes.

The accounting for this constant movement of oil is imprecise because thousands of people are involved. They have sick days, vacations, holidays and other demands on their time. The weekly reporting to the EIA may not be top priority at any given time.

The key here is that the numbers average out over the long term. We know oil inventories decline in the summer. No surprise there because gasoline demand is up.

In fact refinery utilization rose to the highest level of the year jumping more than +2% to 93.8%. That is another interesting number. If utilization rose from 91.6% to 93.8% then why didn't we see a surge in refined products? Refiner output only rose from 19.25 mbpd to 19.28 mbpd or a minimal +30,000 bpd. Something here is not computing. This is another one of those reporting abnormalities that will correct over the next couple of weeks. We will probably see a spike in output and a corresponding rise in distillate and gasoline inventories.

Gasoline inventories were flat with only a 200,000 barrel gain for the week so refiners were not making gasoline or at least not reporting the gasoline that was made. Distillate inventories rose +2.5 million barrels and the 7th week of gains.

Cushing inventories fell to 20.3 million barrels and very close to the assumed operating limit of 20 million. It will be interesting to see if levels continue to fall and what headlines appear from Cushing.

The U.S. production at 8.59 mbpd is the highest production since the week of October 24th 1986 at 8.773 mbpd.

In the graphic below green represents a recent high and yellow a recent low.





Natural gas inventory rose +107 Bcf to 2,129 Bcf last week. The continued strong injections into storage knocked gas prices below the support at $4. Expectations were for a 99 Bcf injection. Gas inventories are still 22.2% lower than the same period in 2013 and 25.5% below the five-year average.

Mild summer weather across the country is leading to low demand for gas generated electricity. Gas production in the East, primarily from the Marcellus, is accelerating. More than 65 Bcf of injections came from the east region alone. Another 13 Bcf came from the West and 29 bcf from the middle of the country known as the producing region.

Inventories of gas in storage rose more than 1 Tcf since mid-April for the fastest gain in more than 11 years.



Market

Volatility spiked last week with the flood of geopolitical headlines and next week is probably going to see that continue. I would be careful about adding new positions until we see how the market reacts to the news over the weekend and the beginning of the week news cycle on Monday.

This is the busiest week in the Q2 earnings cycle and we could be pushed in either direction depending on the quality of earnings and guidance.

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Jim Brown

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