Cushing, Oklahoma
The weekly EIA Inventory report came out today regarding the state of the oil market from the supply side, and the numbers continue to paint a bearish picture of the oil market. For example, Cushing added another one and a half million barrels to storage this past week, that`s three million added over the last two weeks to storage facilities.
Gulf Coast Region
The Gulf Coast is even worse, adding another 5 million barrels to storage last week, and over 9 million added to storage in the Gulf Coast region over the last two weeks. And we are still a long way from the summer driving season, which means we can build all the way up until May in some years. It is going to be quite interesting to see what happens when the storage facilities fill up completely.
Wholesale Product Supplies Bloated
One possible solution would be to ramp up all refineries to max capacity, but the downside for that option is that gasoline and heating oil are already well above last year`s levels at the wholesale level, so not a lot of appetite by wholesalers to take on this suicide mission.
Bang the Close
WTI was up on this bearish news but remember, Oil is another one of the most manipulated markets out there, always has been, and seems like it always will be. They like to get everyone leaning bearish, and try to squeeze them at the close, one of the oldest tricks in the books for the oil market.
In fact, many trading firms have been fined regarding the Oil majors for messaging and chatting the time worn phrase “Bang them at the Close”, which doesn`t really tell us anything regarding the oil market other than a bunch of traders got squeezed at the close on a bearish inventory report.
It happened last week and the following day trading took oil where the report intuitively made sense—back to the $48 dollar a barrel level. This actually is a common occurrence in the oil market: take it up on a bearish inventory report, and sell it off the following trading day, as the newbies curse themselves over their ‘unfortunate luck’ at getting squeezed at the close when oil seemingly does the impossible!
20/40 Inventory Club
Lots of people are calling for a bottom in oil right now, and maybe they are right. Maybe new money has come into the market with the March monthly fund flows, but the actual inventory numbers are as bearish as ever. WTI is up around $4 on roughly 20 million barrels of inventory builds the last two weeks, and close to $8 on roughly 40 million barrels of inventory builds since the beginning of February. I know the CapEx numbers have been cut, but this isn`t going to affect current production run rates anytime soon, and the U.S. Production numbers bear this point out. Still have to have some place to store all this oil!
RIG Counts Misleading
The Rig Count has also dropped, but this is a misnomer because unlike in ‘old fashioned drilling times’ where one Rig represented One well, now one Rig often represents multiple wells attached to the one Rig, due to modern drilling technology. Which means many firms still have wells they are continuing to bring online for the existing Rigs which already have producing wells. This helps explain why the Rig count is going down but the U.S. Production numbers keep climbing.
Next Leg Down
The smaller shale producers are still slightly profitable at current prices believe it or not, due to hedges and lower drilling costs as a result of technological innovation, and we haven`t seen any major consolidation plays so far with the big boys buying up the small producers. I think it will take the next leg down in the oil market for the small players to lower their asking price to fuel some major acquisition deals, a lot of analysts are calling for this as well. We had a cold winter, but it didn`t last near long enough to burn off the products side of the equation.
Inventory Builds Just Beginning
And now that winter is essentially behind us, and the summer driving season is still months away, here come the inventory builds, and we will see if in fact oil has bottomed or is going to take that dreaded next leg down, which all the small producers are holding out against hoping this scenario doesn`t come to fruition. Time will tell, but today`s inventory report doesn`t show any light at the end of the tunnel. Things look as bearish as ever from the supply side of the equation with demand remaining flat. Every week you think this will be the week where we get a slight drawdown, we even get an occasional tease with the API numbers, but then reality sets in with the EIA Numbers, and we set another storage record in the United States!