The Cushing Myth
“Going along with ‘drill, drill, drill’ is now ‘ship, ship, ship,’ ” said John Kilduff, energy analyst with Again Capital.” The bottleneck has been addressed in Cushing [Okla]. We’re seeing those inventories plunge. We’re seeing it from all the rail movement. It’s having an impact, as are the pipeline reversals.”
That is the rhetoric and here are the facts from the latest EIA report: Last year Cushing had 46.8 million barrels in storage and today Cushing has 47 Million barrels in storage. Thank goodness for all the rail and pipeline movements of the last year. I guess “plunging inventories” justifies the recent narrowing of the WTI-Brent spread from a year ago.
Further Reading: Pipeline vs. Rail: Canada Oil Train Crash
Funny Business Going on with Inventories
There was a 20 million withdrawal from inventories the last two weeks for the first time in 30 years. What are the odds that this is wholesalers stocking up for the rest of the summer? Expect a substantial build next week in inventories as Saudi Arabia`s upcoming increased export shipments finally hit the market, many wholesalers summer needs have been met, and product inventories are higher than this time last year.
2% GDP Economy
But the one thing that is apparent is that consumer demand for products didn`t all the sudden spike by a factor of 10 over the last two weeks. Furthermore, Oil inventories still stand at 374 million barrels compared to starting 2013 with 361 million in storage. This is after an unprecedented and highly unusual withdrawal occurrence that doesn`t fit with the 2% GDP growth environment that necessitates the Fed having to stimulate the economy with $85 Billion of monetary stimulus each month, and a total unemployment rate well above the 10% level.
Oil is Fungible
Oil is fungible, and with the emerging markets including China either in a recession or on the brink of a hard landing the Oil has to go somewhere as producing countries need to generate revenue from their primary resource for capital to support budgetary commitments.
The US is the strongest economy and the largest consumer of oil and petroleum products so with China cratering the global competition for oil revenue finds its way to flooding the US market with spare capacity. This brings the price of Brent down, and even if WTI is equal to Brent in terms on the spread, the abundance of Brent will pressure all grades of oil in general, and WTI in specific terms.
7.4 Million Level Reached
Because of the large draws in supplies the fact that US domestic production reached the 7.4 million barrels per day level with the latest EIA report went largely unnoticed. Once refiners revert back to lower capacity utilization rates where is this excess domestic production going to go? You guessed it straight into inventories as unlike the Saudi`s, the US just keeps producing oil regardless of seasonal demand.
Price started the year at $90, and we have 13 Million more barrels in storage Look for oil inventories to finish the year at higher levels than they started the year. Oil inventories are well above the five year range, and the remainder of 2013 will continue this historical trend of increasing levels of oil in storage facilities around the globe.