A drop in Chinese manufacturing and a build in U.S. crude supply are raising questions whether this rally still has legs. WTI (NYMEX:CLH14) got a big boost as Trans-Canada announced the southern leg of the Keystone Pipeline is operational driving up West Texas Intermediate versus Brent Crude as the market anticipates that will mean more products for export and a reduction in the global spread. Yet this must be balanced against demand fears in China after the HSBC's flash China purchasing manager's index fell to 49.6, a six- month low in January from 50.5 in December, indicating a potential contraction in China's manufacturing activity. On top of that, crude supply magically appeared in this week's American Petroleum Institute report.
Ah yes, the case of the missing crude, solved! Well at least partly. The American Petroleum Institute reported that U.S. weekly crude stocks rebounded by rising 4.9 million barrels. That is a signal that the end of the year supply drawdown may be coming to an end. This came as refiners cut runs by 2.2% to 87.9% and an increase in Cushing, Okla. of 771 million barrels. That oil of course is widely expected to find its way down the Keystone pipeline to Texas where those big refineries can turn that crude into product. The run cuts and cold weather also took its toll on distillate leading them to fall by 2.3 million barrels and gasoline inventories added to their bounty by rising by 1.1 million barrels. Is it any wonder why pump prices are falling?
Artic cold seemed to add to support as the marker prepares for both the Energy Information Administration's reports on petroleum and natural gas. Natural gas surged to the highest price since June of 2011. The cold is causing the bears to rethink their perception of adequate supply. Today we should see supply for natural gas fall as much as 150 bcf.
Of course it is the long-term demand stories that have caught the bears by surprise and is a reason to shake off their apathy surrounding supply. The AP Reports that "diesel-burning locomotive, the workhorse of American railroads since World War II, will soon begin burning natural gas — a potentially historic shift that could cut fuel costs, reduce pollution and strengthen the advantage railroads hold over trucks in long-haul shipping. Rail companies want to take advantage of booming natural gas production that has cut the price of the fuel by as much as 50%. So they are preparing to experiment with redesigned engines capable of burning both diesel and liquefied natural gas. Natural gas "may revolutionize the industry much like the transition from steam to diesel," said Jessica Taylor, a spokeswoman for General Electric's locomotive division, one of several companies that will test new natural gas equipment later this year. Any changes are sure to happen slowly. A full-scale shift to natural gas would require expensive new infrastructure across the nation's 140,000-mile freight-rail system, including scores of fueling stations.
The change has been made possible by hydraulic fracturing mining techniques, which have allowed U.S. drillers to tap into vast deposits of natural gas. The boom has created such abundance that prices dropped to an average of $3.73 per million British thermal units last year—less than one-third of their 2008 peak. Over the past couple of years, cheap gas has inspired many utilities to turn away from coal, a move that hurt railroads' profits. And natural gas is becoming more widely used in transportation. More than 100,000 buses, trucks and other vehicles already run on it, although that figure represents only about 3% of the transportation sector.
The savings could be considerable. The nation's biggest freight railroad, Union Pacific, spent more than $3.6 billion on fuel in 2012, about a quarter of total expenses." A Must Read!