US Facing Oil Tsunami

Jim Brown
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There is a veritable wave of oil headed for America and it will push crude prices significantly lower. Middle Eastern countries are in a bidding war about who can sell oil the cheapest.

There are currently 19 million barrels of oil headed to the U.S. from Iraq. That is the most in one month since June 2012. The oil producer sold its oil to U.S. refiners at a discount of $5.85 per barrel off the benchmark rate compared to the discount Saudi Arabia offered of $1.25 per barrel. The steep discount was an incentive to buy Iraq's heavy crude and to steal market share from Saudi Arabia.

Bloomberg Chart

In addition to the oil coming from Iraq there is a record backlog of 39 tankers waiting offshore to unload at the refineries around Houston. In the fall the water in the Gulf of Mexico is warm and when the cold fronts sweep down from the north the ports and ship channel are blanketed with fog. Sometimes is last for days and all tanker activity stops rather than take a chance of a collision and spilling millions of barrels of oil into the channel.

This means we are going to have some serious inventory gains in the weeks ahead as the weather clears and those tankers are unloaded. The gains over the last two weeks have averaged only 3.5 million barrels per week. That could jump to 8-10 million per week if the weather clears.

This is going to pressure prices for WTI, which are already near $40. It is almost inconceivable that we will not see oil in the $30s soon and some analysts are again calling for oil in the high $20s.

Another factor was the IEA warning in the monthly Oil Market Report. IEA Report The IEA said global inventories were at record levels and nearing 3 billion barrels. The pace of inventory growth adding to that record was 1.6 million bpd. That was down from 2.3 mbpd in Q2 but still pushing storage capacities to their limits.

China had been adding to strategic inventories at the rate of 700,000 bpd but that has slowed now that available storage is full. Tanker watchers say tankers full of oil have been parked at various terminals for weeks waiting for available storage so they can unload. These tankers are costing China $37,000 to $50,000 per day while they wait.

The IEA also said global demand growth is expected to slow to 1.2 million bpd in 2016. That is down from a five year high of 1.8 mbpd rate in 2015.

With the U.S. having million of barrels of available storage it makes sense that more oil shipments will be headed our way. Tanker trackers claim there is more than 100 million barrels of oil in floating storage waiting for a home. When countries like Iran produce more than they can sell they sometimes rent tankers to store the oil at sea rather than halt production. Those tankers either ride at anchor or they are directed to a likely consumer where they enter a parking orbit offshore until somebody buys the oil. That can be weeks or months depending on the type of oil and the prices being bid for it.

I expect a tsunami of oil over the next four weeks that will raise to U.S. inventory to record levels and push prices lower. The only exception to the lower prices could be an increase in bombing in Iraq and Syria in retaliation for the Paris attacks. There are numerous oil facilities in those areas and some are under ISIS control. Headlines about oil fields being bombed could cause another short squeeze. Other than a temporary headline bounce, I expect the flood of oil to lower prices.

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Active Rigs

Active drilling rigs declined -4 to 767 for the week ended on Friday and that is another 10 year low. Oil rigs rose +2 for the week to 574 breaking an 11 week string of declines. Active gas rigs fell -6 to 193. Active rigs have now declined -1,164 since the high of 1,931 in September 2014. Active offshore rigs rose +1 to 33.

Baker Hughes reported the international rig counts for October and active rigs declined -85 to 2,086. That is down -1,571 from the 3,657 active in October 2014.

Oil Inventories

Crude inventories rose +4.2 million barrels to 487.0 million. That is only 3.9 million below an 80-year high.

Refinery utilization rose from 88.7% to 89.5% as the fall maintenance season winds down. That is down from the high of 96.1% on August 7th.

U.S. production rose 25,000 from 9.160 to 9.185 mbpd and a nine-week high.

Cushing inventories rose from 53.1 million to 55.4 million.

Gasoline inventories fell -2.1 million barrels to 213.2 million.

Distillate inventories rose 400,000 barrels to 141.1 million.

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

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