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Cushing:Hell Gate

Enlarge Figures reported by the EIA on Dec 31 2014, (Click the left image) shows The two reasons for the collapse of the structure of the International Crude Oil system.The Cushing Crude oil inventories stood at 44 million barrels (see the graph) On Jan 20014, When the fastest and largest stock draw down started in living memory to reach its minimum 0f 19 million Barrels In September 2014 .

These figures were taken by the Futures market, as shortage of supply consequently the Market went bullish WTI on futures market NYMEX ( CME )jumped to its maximum see (Graph)

cushingWait . In fact , that was the worst signal the futures market have ever received from Cushing, The massive draw down of crude of inventory in Cushing was not because of excess demand , but due to The moderation of the infrastructure in Cushing(as mention above)j Crude oil inventory was just moving from Cushing hub Storage to USGC Storage. And also to storage in Pad1Leaving the overall USA inventories to escalate to its maximum of 388 million barrels in March and the WTI also standing at its maximum!!!

(Click the next image) for the level of commercial crude oil inventories in USA

That is to say, with weak demand, the Total Commercial stock of crude oil in USA increased, and not decreased prices should have gone down during that period, ( click the image).The lesson is, never look at Cushing again for Signal it has change. Cushing is just an oil Junction now .To know the true inventory level , one should look at the USCS plus Cushing inventory for any Market signal.

SPR the bullet in the head

cushingThe second reason was, that pushed inventory up even further , was The USA state Department decision to release crude from SPR (Strategic Petroleum Reserve was 700 Mb of crude oil on Jan 014 ,stored in vast salt caverns used only if USA is confronted with an economically-threatening disruption in oil supplies.).

In the past, SPR releases have occurred three times . First, in 1991, at the beginning of Operation Desert Storm,The second was in September 2005 after Hurricane KatrinaThe third on June 23, 2011, during the unrest in Libya.

We must also mention that twice in the past, the Administration has conducted test sales to ensure the readiness of the Reserve . The first took place in 1985 and the second in the 1991's before Operation Desert Storm. Also Non-Emergency Sales were made three times during 1996, to raise revenues. The total quantity sold was 28.1 million barrels from the SPR

The USA State Department, took the market by surprise.On March 14,2014, during the crisis in Ukraine, and the annexation of Crimea by the Russians , the white house decided to release 5 million barrels of crude from SPR to be released on May 10 2014 .The reason for the release was given "Due to the recent dramatic increase in domestic crude oil production, significant changes in the system have occurred . The White House said the release was only a test and was not linked to tensions with Russia .

That was the mind blowing decision, ,and all were caught by surprise because any withdrawal from SPR , no matter how small, is confined to Emergency , but carrying out SPR test at the height of Ukraine crisis , it amounted to advertising the seriousness of the situation, and surely gave the wrong market signal. Which oddly enough with a false signal from Cushing.With an earlier warning by Henry Kissinger: If "You Cant Hear the Drums of War You Must Be Deaf" caused panic stocking building, and who wouldnt panic.

So, This was taken by the Futures Market to mean starting from March 2014 ,as "Emergency, full your tanks ,and there is a "threat to supply interruption from Russia". As a result, the Futures Market went bullish ,prices increased , the USA Crude inventories reached maximum for speculative purposes, because speculators were still looking at Cushing inventories which showed mistakenly at minimum

During this period, Export of petroleum products stayed at its lowest point at 2668 Mb/d , while import of crude was still arriving to refineries that were working already at their lowest utilization for the year.,at a time the Russian were threading to stop the gas supply, giving more imputes to Brent price to rise .

A False Signal and a False Alarm from Cushing to NYMEX

cushingWe saw for the first time both crude prices and Inventory level moving in tandem reaching the maximum . That was the situation in May and June 2014,all was bullish and USA production of crude was increasing too,until, suddenly, the gate of hell was opened on the Oil Industry in June and July 2014, when the market discovered that ,the prospect of supply interruption was false alarm( see the Time line) , the drums of war went quite again, The, avalanched started, traders and oil companies began to move their crude oil out of the giant tanks faster than at any time in recent memory. selling at any price, export of petroleum products increased sharply to reach 38404 mb/d , import of crude was reduced leaving the international market with surplus: and Brent WTI spread reaching the minimum for the year, see graph , refiners returned to %84 utilization and With weak demand camouflaged by events in the middle east, which we reported at that time ( Read below Hydra)

Prices began caving in. While who knew what was going ,went "short" and made billions , as for those who listened to the drums of war should be deaf by now.... The lesson is: Emergency Reserve is for emergency, and the timing of the release, if it was for "testing" then it was badly timed and proved to be the reason for the crisis, at a time when Cushing was also discreetly changing from Gate of Hell to an ordinary junction

Economical to restock at $55

That is not the end of the story. Destocking during this period in panic, meant a fall in commercial inventories from 388 to 233 which is just too much. Therefore a new wave of crude oil stocks has started again and also beyond and above the seasonal requirements everywhere. China is restocking, and Cushing is full again.( Even the crude oil producers in OPEC and Russia are also Stocking( another way of production cut!!!) Because at $55 per barrel it is economical to add to inventory, if they are full, then slow steaming tankers will be a better choice, this process will go on until March. . we have now the new catalyst For revival of demand, which restocking.

We also still have the statement of HE Saudi oil minister, that "Crude price falls are temporary". Indeed, part is temporary but the other part has to wait for the economic rebound in the global economy. But according to our data , the global economic situation is now at the top of the recovery that started in 1982, and we are heading now in a cyclical manner towards the next mini recession in 2016.

While all are busy nursing their wounds. we have the Futures Market is searching for the price that will balance the market again. The Oil prices remain a mystery , as long as the picture between USA and Russia changes Constantly

The Oil prices remain a mystery , as long as the snap dots between USA and Russia changes .The Middle east has to wait until we get a clear and steady image

All Graphs are updated automatically

Jabbar al-Jaf former OPEC Econometrician Analyst