Crude Inventory Rises Despite Increased Gasoline Demand

Jim Brown
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The API and the EIA both reported higher levels of crude in the U.S. this week and both showed a sharp drop in gasoline. BP neared a fix on the oil leak as Congress prepares to leak on BP.

The EIA reported a 1.9 million barrel increase in crude inventories to 362.5 million barrels. This is the highest level since the same period in 2009. Inventories do tend to increase ahead of the summer driving season. The API report showed a gain of only 400,000 barrels to a level of 364.3 million. Both reports eventually arrive at the same levels although normally a couple weeks apart. The API report had been registering significantly higher gains of 4.2 mb more than the EIA in the prior two weeks.

Gasoline inventories fell -2.8 million barrels according to the EIA to 222.1 million. The drop was due mainly to a sharp decline in gasoline imports. Gasoline inventories are now 6.6% higher than the same period in 2009.

Refinery utilization fell to 88.4% from 89.6% in the prior week. That was the highest level in 2010.

The MasterCard Spending Pulse report showed gasoline demand rose by +1.4% last week. This is typical as the weather improves and consumers spend more time out of the house. I was concerned that the gulf disaster might have impacted consumption in the southern coastal states but so far that has not occurred. Evidently there is plenty of extra activity in efforts to prevent oil from reaching the beaches that a decline in demand has not occurred.

Because of the decline in gasoline inventories and the slight increase in demand the crack spreads are likely to reach $18 this week. This is the highest level since the summer of 2007. Refiners should be thrilled but they need to be careful not to flood the market with refined products or prices will fall. The decrease in refinery capacity over the last two years through plant closures in the U.S. will help maintain those margins.

Gulf Update

Testimony to the House committee today did not go in favor of BP. There were multiple data points that suggested BP is not only to blame but could have more serious problems for failing to maintain the equipment and ignoring critical test results.

BP has been blaming the entire mess on Transocean because of the failure of the blow out preventer. In testimony today Transocean said it extensively modified the BOP in 2005 at the request of BP. The modifications included removing one of the shear rams that is supposed to slice through the drill pipe and seal the well in the case of a blowout. That is not a favorable event for BP.

The testimony removed Cameron International (CAM) as a responsible party since the BOP had been heavily modified. Cameron shares gained +2.36 after the news broke today.

BP also testified that the battery was dead on the BOP kill switch on the rig floor that was supposed to activate the BOP in case of emergency. Since that battery is still on the rig on the ocean floor it shows that BP new the battery was dead before the incident.

Transocean has been pointing the blame at the Halliburton cement job as the primary cause of the explosion. Testimony was given today that after Halliburton cemented the casing and allowed it to cure there were two different tests run on the well to verify that the cement was done correctly and there was no gas seeping into the well from the outside. Both tests failed. Both tests showed the presence of gas seeping into the well from a faulty cement job. This should be Halliburton's smoking gun except that BP elected to ignore the results of the tests and proceed with removing the drilling mud.

Reportedly there was a argument between Transocean and BP on whether to proceed. We know that BP won the argument and their decision turned fatal.

Halliburton said once the tests showed the cement had failed the desired course would be to shoot holes in the casing and add more concrete between the casing and the rock. Then install a new section of casing to replace the pierced section. This maneuver would have taken a week to 10 days and cost between $5 to $10 million dollar due to additional rig time on location and the cost of the contractor to oversee the procedure.

I reported yesterday that BP made the unorthodox decision to remove the drilling mud and replace it with seawater before the bottom concrete plug had been inserted. In testimony today there was some confusion over that fact. One piece of testimony said a plug had been inserted and other testimony contradicted that assertion. Either way BP began removing the drilling mud and a couple hours later the well exploded.

Regardless of the sequence of events the concrete tests failed and the concrete did not hold. When BP began removing the drilling mud the disaster was set into motion.

The facts are piling up on BP and the outlook is not good.

BP knew the BOP was missing a shear ram because they requested the modification.

BP knew the battery was dead on the BOP kill switch

BP knew the concrete had not sealed the well.

BP made the unorthodox decision to remove the mud before setting the bottom plug.

BP overruled Transocean over the decision to ignore the failed tests.

BP was in a hurry to exit the well and move to a new location and that caused them to ignore numerous safety issues.

Unless there is some new revelation soon the preponderance of the evidence is stacking up against BP and they are going to be fined, billed and censured over the disaster. The blatant ignoring of the casing cement tests could actually make them liable for the injuries and deaths as well instead of Transocean.

Readers keep asking me if BP is a buy because of their market cap loss of $30 billion. I think we need to see the smoke clear first and watch for cost estimates to subside before considering BP again.

BP claims the new containment device is resting on the seafloor beside the leaking riser. They could install it on Thursday but they are currently exploring the possibility of attaching a pipe directly to the broken riser instead. This seems to be the "fix of the day" rather than a coherent plan of attack. Either way Thursday should be pivotal.

Jim Brown

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