Crude Oil ( ) Brent Crude ( ) Natural Gas ( ) S&P 500 ( ) PHLX Oil ( )

CRUDE OIL INVENTORY/’000 bbls (Week Ended 12/05/14)

crude_oil_cuttingsCurrent: 380,789

Actual Build/(Withdrawal): 1,454

Economist Average Estimate: (2,625)

Previous: 379,335

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KLR Group (12.10.14)Demand

Demand of ~19.5 Mmbpd decreased ~1.9% w/w, while the four-week moving average increased ~20 bps to ~2.6% higher y/y. Gasoline demand of ~8.5 Mmbpd was down ~9.3% w/w, and distillate demand decreased ~3% to ~3.5 Mmbpd. In ’14, we expect US demand to increase fractionally y/y to approximately 19 Mmbpd.

Inventories

Composite inventories increased ~15.2 Mmbbls, versus the consensus estimate of a ~1.5 Mmbbls build w/w. API reported a ~15.4 Mmbbls increase in composite inventories w/w. Crude oil supplies grew ~1.5 Mmbbls, while consensus expected a ~2.7 Mmbbls decrease and API estimated a build of ~4.4 Mmbbls. Gasoline stocks increased ~8.2 Mmbbls versus the consensus estimate of a ~2.6 Mmbbls build w/w. API reported a build in gasoline stocks of ~6.7 Mmbbls w/w. Distillate inventories grew ~5.6 Mmbbls w/w, versus the consensus estimate of a ~1.6 Mmbbls build. API reported an increase in distillate stocks of ~4.3 Mmbbls.

Cushing stocks increased ~1 Mmbbls w/w to ~24.9 Mmbbls, while API reported a build of ~0.9 Mmbbls. Midwest stocks drew ~0.9 Mmbbls to ~99.3 Mmbbls (~83% of capacity). WTI decreased ~$1.29 after the report release and is currently down ~$3.10 today at ~$60.75.

Thesis (as of October 13, 2014)

Our long-term Brent oil price expectation is $100, while our long-term NYMEX price forecast is ~$92.50. Global oil fundamentals suggest a need for the OPEC Gulf states (Saudi Arabia, UAE, Kuwait) to lower output a combined ~1.25 Mmbpd next year to maintain market balance assuming the current level of geopolitical production disruptions.

Intrinsic to our forecast is a Brent/WTI spread of $7.50 necessary to incentivize the evacuation of Williston Basin crude to the East/West Coasts by rail. We believe pipeline transportation to the Gulf Coast is the marginal connectivity mechanism between interior NAM and the Gulf Coast, while coastal crudes should generally trade at a several dollar discount to Brent to displace remaining lighter grade crude imports (East Coast) and partially displace medium grade crude imports (Gulf Coast).


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