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CRUDE OIL INVENTORY/’000 bbls (Week Ended 1/23/15)

crude_oil_cuttingsCurrent: 406,727

Actual Build/(Withdrawal): 8,874

Economist Average Estimate: 4,000

Previous: 397,853

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ANALYST COMMENTARY

Raymond James Equity Research

This week’s petroleum inventories update was modestly bullish relative to consensus. “Big Three” petroleum inventories (crude, gasoline, distillates) rose by 2.4 MMBbls, versus consensus estimates for a build of 2.9 MMBbls. Crude inventories, however, increased by 8.9 MMBbls, more than double the consensus expectation for a build of 3.9 MMBbls. Cushing crude inventories rose by 2.1 MMBbls, with Gulf Coast inventories up 5.5 MMBbls. Total petroleum inventories were up 2.0 MMBbls.

Refinery utilization sharply rose to 88.0% from 85.5% last week. Total petroleum imports were 9.8 MMBbls per day, up from last week’s 9.4 MMBbls per day. Total petroleum product demand increased 1.5% after last week’s 5.1% increase.

Amid a rapidly shifting macroeconomic and geopolitical backdrop, there has been plenty of volatility in oil prices over the past year – including an exceedingly sharp correction from mid-2014 through the present, taking prices to five-year lows. During the past six months, negative datapoints have come out of several key economies: China, Japan, and the eurozone. Demand continues to decline for OECD countries in aggregate, and demand growth in China and other emerging markets is slow, in part due to declining oil intensity. On the supply side, non-OPEC supply is trending up, driven largely (though not exclusively) by robust growth in the U.S. Of course, the wildcard remains the possibility of supply disruptions (above and beyond the lingering outages in Libya). The geopolitical risk premium in oil prices has clearly subsided, strength in the U.S. dollar has further pressured oil prices, and OPEC’s Nov. 27 decision not to cut production eliminated that potential source of support. Bearing all that in mind, on January 5 we cut our 2015 Brent forecast from $90/Bbl to $68, and WTI from $75 to $62. We anticipate that prices will continue to bottom in the first half of 2015, followed by a stronger recovery in the second half and into 2016 – but not back to triple digits. The 12-month futures curve is currently at $60.65/Bbl for Brent and $55.96/Bbl for WTI.

KLR Group 

Demand
Demand of ~20.5 Mmbpd increased ~1.5% w/w, and the four-week moving average increased ~80 bps to ~4.7% higher y/y. Gasoline demand of ~9 Mmbpd was up ~2% w/w, and distillate demand increased ~1% to ~4.6 Mmbpd. In ’15, we expect U.S. demand to increase ~1% y/y to ~19.2 Mmbpd.

Inventories
Composite inventories increased ~2.4 Mmbbls, versus the consensus estimate of a ~2.9 Mmbbls build w/w. API reported a ~7 Mmbbls increase in composite inventories w/w. Crude oil supplies grew ~8.9 Mmbbls, while consensus expected a ~3.9 Mmbbls increase and API estimated a build of ~12.7 Mmbbls. Gasoline stocks decreased ~2.6 Mmbbls versus the consensus estimate of a ~0.5 Mmbbls build w/w. API reported a draw in gasoline stocks of ~5 Mmbbls w/w. Distillate inventories decreased ~3.9 Mmbbls w/w, versus the consensus estimate of a ~1.5 Mmbbls draw. API reported a decrease in distillate stocks of approximately 0.7 Mmbbls.

Cushing stocks increased ~2.1 Mmbbls w/w to ~38.9 Mmbbls, while API reported a build of ~2 Mmbbls. Midwest stocks grew ~1.1 Mmbbls to ~120 Mmbbls. WTI increased ~$0.35 after the report release though is currently down ~$1.17 today at ~$45.06.

Thesis (as of January 13, 2015)
We expect Brent/NYMEX $62.50/$57.50 oil prices this year and $85/$80 next year. In our view, the negative supply implication of lower global oil resource capitalization over the next two years, evident in the U.S., supports a long-term Brent/NYMEX oil price forecast of $100/$92.50. A long-term Brent/NYMEX $100/$92.50 oil price is sufficient to generate an industry norm ~5% return on invested capital.

We believe from Saudi’s perspective, the magnitude of the necessary supply reduction, largely attributable to robust growth in U.S. tight oil, rendered the role of swing producer less economic than maintaining output and allowing oil prices to fall meaningfully below equilibrium in the near-term.


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Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.