Reality is Rapidly Approaching

Jim Brown
 
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The April 17th meeting in Doha Qatar is rapidly approaching and traders are finally starting to realize that even if there is an agreement it will be meaningless.

Prices rebounded this week after there was an unexpected 4.9 million barrel decline in U.S. inventories. The headlines were full of titles like "crude glut shrinking" and "production declines reduce inventories." Nothing could be farther from the truth but the press never lets the truth get in the way of a sensational headline.

U.S. inventories declined for multiple reasons. Imports declined by 500,000 bpd last week after a -630,000 bpd drop the week before. Over the last two weeks total imports declined by -12.3 million barrels. Obviously there is a reason. I research it and the Houston Ship Channel was closed because of fog for multiple days last week. I am assuming that was the problem the week before as well because there were 26 tankers outside the port waiting for permission to enter and make deliveries. If each was only 1 million barrels that would be 26 million. Some may be smaller but I am sure there were some VLCC tankers (2.0 mb) in the mix.

That would have been enough to cause a serious drop in inventories but that was not the only problem. TransCanada shutdown the 590,000 bpd Keystone pipeline that moves crude oil to Cushing Oklahoma and Illinois. That was shut down for several days. That means another 2 to 3 million barrels did not make it to their destination.

If I am right about what caused the drop in inventories we should see a monster build over the next two weeks as all those deliveries catch up.

U.S. production did decline by 14,000 bpd. That is hardly enough to even be noticed since refiners use 16.5 mbpd. It was not even a drop in the proverbial bucket.

We are reaching the point in the season where refiners consume more oil. They have to switch over to summer blend fuels by May 1st and now that maintenance season is over they are moving to full production. Utilization last week rose to 91.4% and the highest level this year. However, what that means is they consumed 16.43 mbpd compared to 15.85 mbpd back in February. That is 580,000 bpd more than February. That is hardly enough to create that big drop in inventories last week. In fact, refiners only consumed 200,000 bpd more than they did the week before.

You have to be careful about believing what you read in the headlines. Rarely are they written by anybody that knows anything about the oil industry.

The Doha agreement, if it happens, will likely not include Iran, Libya, Iraq or the UAE. All of those countries are raising production from current levels rather than freezing production. The UAE is expanding production from 3.1 mbpd to 3.5 mbpd by the end of 2017. Iraq has been producing an average of 3.494 mbpd so far in April. That is up from 3.286 mbpd on average in March. Iraq is expanding production to 6.0 mbpd by 2018. Libya has very little current production. They are trying to quell the fighting and make deals with the rebels in order to return to the 800,000 bpd they produced in 2014 on the way to the 1.6 mbpd they produced before Gaddafi was overthrown.

Saudi Arabia has 128 active rigs and they are planning on increasing annual production through 2020. Saudi Arabia and Kuwait agreed last week to restart production of 300,000 bpd from the disputed zone that has been halted for the last two years.

Iran is producing between 2.4 and 2.6 mbpd and is targeting 4.0 mbpd by the end of 2017.

Currently there is a minimum of 1.0 million bpd of excess production and probably more. Goldman Sachs said on Wednesday they expect OPEC production to rise 600,000 bpd in 2016 and another 500,000 bpd in 2017.

Given the facts I have outlined above any agreement to freeze production by the countries I did not mention will have zero impact on current production and future increases. A post meeting announcement that claims a production freeze may lift prices temporarily because the headline traders will think the problem is solved. Several days later reality will return and the entire three-month lead up to this event will be forgotten.

The only event that could lift prices meaningfully and for a prolonged period would be an agreement to cut production and that is not likely to happen. We will get another chance for headline spam when the real OPEC production meeting occurs in early June.

In my opinion a failure to agree even if the agreement is worthless, will cause a significant decline in prices, probably to $30. For this reason, I expect them to agree to something and blast the news all across the globe. If that happens it may take several weeks for prices to decline once reality breaks through the smoke screen.

I believe we will see WTI prices between $30-$35 for a long time even though the summer driving season typically pushes prices higher. As long as there continues to be 1.0 mbpd of excess production the prices cannot rise materially.



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  Active Rigs

Active drilling rigs declined -14 to 450 for the week ended on Friday 4/1 and that is a 65 year low. Oil rigs fell -10 for the week to 362. Active gas rigs declined -4 to 88. Active rigs have now declined -1,481 since the high of 1,931 in September 2014. Active offshore rigs were down -2 at 28.


Oil Inventories Week Ended 4/01/16

Crude inventories fell unexpectedly -4.9 million barrels to 529.9 million. The prior week was a historic high at 534.8 million.

Refinery utilization rose from 90.4% to 91.4% and the high for the year.

U.S. production declined -14,000 bpd from 9.022 to 9.008 mbpd.

Cushing inventories rose were flat at 66.0 million. Cushing only has 3.0 million barrels of available capacity at that level.

Gasoline inventories rose +1.4 million barrels to 244.0 million.

Distillate inventories rose +1.8 million barrels to 163.0 million.

Details in the graphic are for the prior week. All numbers are not available until the Friday of the following week. In the graphic below green represents a recent high and yellow a recent low. The blue-green represents a record high.


The weekly OilSlick Newsletter is a publication of OptionInvestor.com. Please visit OilSlick.com to sign up for the free email newsletter that comes out weekly.

This is a publication of the Option Investor Newsletter. Learn how to profit with options on stocks and indexes. If you would like daily market commentary and option recommendations you can sign up for a free trial and have the daily plays and commentary delivered to your inbox. No credit card or phone number necessary.

Free Trial Now

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