A billion barrels of oil on the wall, a billion barrels of oil!
Just after North Dakota celebrated its billionth barrel of oil out of the Bakken oil formation the U.S. Energy Information Administration (EIA) reported a record amount of oil in storage. EIA said crude stockpiles rose 1.7 million barrels putting commercial crude inventories to 399.4 million barrels. This put pressure on oil (NYMEX:CLM14) that looks to be starting to discount Ukrainian risk and focus on a seasonal peak. Add to that the Fed continues to taper and U.S. growth is anemic which really lowers oil demand expectations. While we may see a recovery spike barring any supply shocks we have most likely topped out. This comes son the heels on previous inventory builds.
As I wrote last week there are signs that oil products will now start to build and that means we should see U.S. pump prices start to decline very soon and perhaps vey substantially. The EIA reported that gas supply increased by 1.56 million barrels and distillates by 1.94 million barrels. We were one of the few that predicted a build and a price peak for products.
Of course the high quality of shale oil is screaming for more pipeline infrastructure to be built. The purity of the oil makes it very volatile and once again we saw evidence of how much. Yesterday a CSX Corp. crude train derailed in Lynchburg, Virginia, causing a fire and spilling oil into a river and triggering a partial evacuation of the city’s downtown.
Natural gas (NYMEX:NGM14) gets its report today and the race to refill storage is garnering more attention. We of course have been a long time bull on natural gas and now many are seeing our point of view. We have had a target of $700 gas by 2015 and Goldman Sachs is calling for $600 very soon. Bloomberg News reports -- U.S. energy producers are sticking with oil over natural gas, boosting Goldman Sachs Group Inc.’s view that gas at a six-year high may still have room to rally. Drillers switched their focus to oil in 2012, when gas futures dropped to a decade low. While gas has more than doubled since then, surging this year as frigid weather eroded stockpiles, crude remains more profitable, according to Loomis, Sayles & Co., which manages $200 billion. Goldman Sachs said this month that gas may have to trade between $5.75 and $6.50 per million British thermal units to spur a supply increase, up at least 19% from current prices.
We feel options are a bargain in gas and we are playing it across the curve. This is a great time to put on option strategies. We are looking for a build, most think in the 70’s but it could be less. Working gas in storage was 899 Bcf as of Friday, Apr. 18, 2014, according to EIA estimates. Stocks were 831 Bcf less than last year at that time and 1,008 Bcf below the 5-year average of 1,907 Bcf. In the East Region, stocks were 470 Bcf below the 5-year average following net injections of 17 Bcf. Stocks in the Producing Region were 412 Bcf below the 5-year average of 805 Bcf after a net injection of 22 Bcf. Stocks in the West Region were 127 Bcf below the 5-year average after a net addition of 10 Bcf. At 899 Bcf, total working gas is below the five-year historical range.