New Record Ahead

Jim Brown
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It is only a matter of time before U.S. oil inventories set a new 40-year high. Inventories increased last week by 7.8 million barrels and we are just getting started in the inventory season.

Typically, oil inventories build over the fall and winter months and then decline over the spring and summer months as the driving season shifts into high gear. Last year, from the end of September to the end of April we added +134 million barrels to U.S. inventories. That pushed the inventory levels to a 40-year record of 490.0 million barrels.

From April 24th 2015 until the end of September, we only saw inventories decline by -45 million barrels. That means we used ONLY ONE THIRD of the inventory buildup from 2014 and there are seven months of inventory builds in front of us.

There is no scenario where we do not exceed the multi-decade high at 490.9 million and exceed it by a lot. That buildup caused prices to decline from $92 at the end of September 2014 to $42 in March 2015. Why would this year be different except that we are starting from a much higher inventory level and a much lower price level?

U.S. production has declined -514,000 barrels per day since the peak in April at 9.612 mbpd. Despite that decline, we still added 7.8 million barrels to inventory last week. The immediate culprit is the seasonal maintenance period for refiners that takes as much as 2.0 mbpd offline at the peak of the maintenance process. However, the real reason inventories build in the fall and winter is simply a decline in demand. Even at the current $2.29 per gallon national average for gasoline, there will still be a seasonal slowdown in demand.

We can expect lower prices in the months ahead as those inventories hit new highs. The 468.6 million barrel level last week was only 22.3 million barrels below the April high at 490.9 million. It is entirely conceivable we could see a new high by Thanksgiving. That means your trip to grandmas for turkey dinner could be on really cheap gasoline.

The chart below covers 35 years of inventory and you can clearly see that the gains last year were out of the ordinary and have not been reversed.

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Active Rigs

Active drilling rigs declined -8 to 787 for the week ended on Friday and that is a 10 year low. Oil rigs fell -10 for the week to 595. Active gas rigs rose +3 to 192. Active rigs have now declined -1,144 since the high of 1,931 in September 2014. That is a -63% drop. Active offshore rigs were rose +1 to 33, down -28 from year ago levels.

Oil Inventories

Crude inventories rose +7.8 million barrels to 468.6 million.

Refinery utilization fell from 87.5% to 86.0%. That is down from the high of 96.1% on August 7th.

U.S. production declined +76,000 barrels to 9.096 mbpd, down from the 9.61 mbpd and 40-year high in June.

Cushing inventories rose slightly to 54.2 million from 53.1 million.

Gasoline inventories fell -2.6 million barrels to 221.3 million.

Distillate inventories fell -1.5 million barrels to 147.6 million.

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

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