Here’s one simple way to see U.S. oil production keep increasing

I do not think over the long term oil demand growth will be enough to absorb the robust production levels that are currently being projected by the various agencies… like the EIA. Some level of crude oil exports will be required to allow producers to continue to invest and maintain aggressive oil production growth rates in the longer term. Absent a broader definition of crude oil exports, production levels in the U.S. could be impacted over the longer term.

As I have previously discussed in the newsletter an interim compromise to allowing blanket exports is to waive the Jones Act requirement for American Flag vessels for all crude oil movement from the U.S. Gulf Coast to the East and West Coast. This would reduce the cost of these movement, make them more economically feasible and likely result in another level of crude oil import reduction. This would be a good comprise for producers and those seeking to continue to take advantage of lower cost feedstock’s in the U.S.

The above is more of a medium to longer term issue that will eventually have an impact on the price of oil in the U.S. as well as the various physical spreads around the country. For now the market is biased to the undersupplied side of the equation with the spreads in many areas continuing to tighten. The Brent/WTI spread has narrowed after peaking above the $14/bbl level while the LLS/WTI spread has been trading at double digit levels of late.

We are now entering an interesting period as the Keystone Gulf Coast Pipeline is scheduled to start commercial operations this week at a tad less than half capacity. This will be the next test in how the U.S. Gulf Coast absorbs additional oil from the Cushing area.

This week the EIA will release its oil inventory snapshot one day delayed due to the holiday on Monday. The API data will be released late Wednesday afternoon with the EIA inventory report scheduled for release at 11 am on Thursday. Finally the EIA Nat Gas inventory report will be released on time on Thursday at 10:30 AM EST.

My projections for this week’s inventory report are summarized in the following table. I am expecting a modest build in crude oil stocks as the restocking process gets underway. I am also expecting a modest build in gasoline inventories and a small draw in distillate fuel on some cold weather last week with refinery run rates holding mostly steady.

I am expecting crude oil stocks to increase by about 2.8 million barrels. If the actual numbers are in sync with my projections the year over year comparison for crude oil will now show a deficit of 10.1 million barrels while the overhang versus the five year average for the same week will come in around 12.7 million barrels.

I am expecting crude oil inventories in Cushing, Ok to show the third weekly stock increase in a row even as the Keystone Gulf Coast line fill process is continuing. This will be bearish for the Brent/WTI spread this week.

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