Stormy Week

Jim Brown
 
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Three named storms are currently in progress but none of them are heading for the oil patch. We have been fortunate for several years now that there has not been a repeat of Katrina.

In the Atlantic tropical storm Cristobal is heading up the eastern coast well offshore and it no threat to anyone at the present. In the Pacific tropical storm Karina, with winds of 50 mph is heading westward from Mexico. Hurricane Marie with 160 mph winds is a category 5 storm and it is heading northwest from Baja and also well offshore and not a danger to any land at present. However, anyone offshore and not able to get out of Marie's way would be in for a really bad day. 160 mph winds are predicted to cause massive swells in southern California by Tuesday.

There are multiple price points for crude oil inside the USA. Most are familiar with Cushing Oklahoma where WTI is priced. Midland Texas is a price point for oil out of the Permian Basin. Last week the glut of oil coming out of the Permian caused the oil sold at the Midland delivery point to be discounted -17.50 per barrel less than WTI at Cushing. That was an historical record that exceeded the problems in late 2012 when production capacity exceeded pipeline capacity. Recent refinery outages in the area have caused a new glut of crude on a short term basis but the rapidly expanding production from the Permian is going to weigh on prices until more pipeline capacity is completed.

The 140,000 bpd Phillips 66 refinery in Borger Texas has shut down for repairs. Additional outages at refineries in Houston and Port Arthur are reducing demand for Permian crude in that region.

In 2013 Magellan Midstream Partners reverse and repurposed the Longhorn pipeline to move 225,000 bpd of crude from the Permian to Houston and that relieved the bottleneck temporarily. Magellan's 300,000 bpd BridgeTex Pipeline should begin filling soon and it will deliver Permian oil to Houston, Galveston and Texas City. The Cactus Pipeline will open in 2015 and ship 200,000 bpd to Corpus Christi Texas. Until all these pipelines are up and running the WTI from Midland will continue to be sold at a significant discount to WTI at Cushing.

The EIA is projecting Permian production of 1.7 mbpd for the month of August. That is 300,000 bpd more than the same period last year. Production from the Permian is increasing at the rate of one pipeline per year. That is keeping the pipeline companies busy.

Oil Inventories

The hurricanes did not swell the crude inventories. Crude inventories declined -4.5 million barrels to 365.2 million. This was four times the expected -1.1 million barrel decline. Feeding the decline was a drop in crude imports of -387,000 bpd and a jump in refinery demand of +204,000 bpd. U.S. production rose only slightly by +21,000 bpd.

Refinery utilization also rose unexpectedly from 91.6% to 93.4% in what was probably a last run or gasoline prior to the Labor Day driving weekend. After Labor Day the utilization will fall sharply as refineries prepare to switch over to winter fuel blends.

Cushing inventories rose almost 2 million barrels to 20.2 million and a five week high. This could be an early sign of the coming decline in gasoline demand. Refiners are cutting back on their deliveries ahead of the slack season. However, with crude prices at 9 month lows, we could see refiners begin to load up on cheap crude. It will be interesting to see how the inventory flows over the next month.

Gasoline inventories rose +585,000 barrels for the first gain in three weeks. The prior two weeks saw a drop of -5.6 million barrels. Gasoline production declined -366,000 bpd and gasoline imports rose +271,000 bpd. U.S. demand increased +149,000 bpd. The decline in production would seem to be contrary to the spike in refinery utilization but as in the past I think we are seeing some reporting errors that will equalize over the next couple weeks. You can't increase refinery utilization significantly without producing a lot of additional products. This suggests we will see a bump in gasoline inventories next week.

Distillate inventories declined by 960,000 barrels and the third weekly decline. Distillate production rose +190,000 bpd while imports and demand were flat. This is another sign the product reporting is behind. Inventories don't go down on flat demand while refinery utilization is up.

Refinery utilization was 91% in the same week in 2013 and 91.2% in 2012. Something does not compute given the spike in utilization to 93.4% last week.

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





Propane inventories continue to soar with the addition of +2.5 million barrels to bring inventory levels to 72.8 million. That is 10.8 million barrels more than the same period in 2013.

Demand declined sharply from 919,000 bpd to 788,000 bpd. If you need propane for the winter now is the time to buy it. Prices are going up after Labor Day. The weather forecasters are predicting a colder than normal winter.


Natural gas inventories rose +88 Bcf to 2,555 bcf. This continues to be the fastest build in 11 years. They are still -535 Bcf below the five year average at 3,090 Bcf.


Market

The S&P futures are up +4 points late Sunday evening. The withdrawal of the Russian trucks from Ukraine has eased the geopolitical tensions. Germany, Russia and Ukraine officials are supposed to meet this week to try and hammer out a peace plan. I seriously doubt the talks will be productive but the market is trading higher on the news.

I still expect the market to be choppy on very low volume until after Labor Day so be prepared.

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Jim Brown

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