Oil Prices hit a three week high only to be rebuffed overnight by the thought of slowing in China, the possibility that Greece may need another bailout and perhaps, rising supply. Other than that we still have Iran and Syria worries in the back ground. Saudi Arabia is pumping up a desert storm sending massive supply to the US to either try to win favor with the Obama admistration or to cover for the possibility of an attack that may be in the works. The New York Times reported that the a classified war simulation held this month to assess the repercussions of an Israeli attack on Iran, forecasts that the strike would lead to a wider regional war, which could draw in the United States and leave hundreds of Americans dead, according to American officials.

Christine Lagarde is worried about what is happening in our bond market saying the world is still in a danger zone. In other words, do not be tempted to start tightening despite what our bond market is saying. While yesterday it seemed the market ignored her warning but now, 24 hours later, perhaps they are starting to pay a bit of attention.

Another refinery hit the dust and to keep refiners in China from going bust like refineries in the US, they are increasing domestic fuel price for the second time in two months. Valero is the latest causality of refinery losses. While not a big gasoline producing refinery it seems that refiners are getting slaughtered by high input costs and tougher regulations.

China may try to control inflation by setting prices but in an admission that Brent crude prices are getting out of control, they have been forced to raise prices for domestic consumption much faster than expected. While this may slow demand a bit, the Chinese have some wiggle room as inflation is a tamer. Besides if they don't raise prices, refiners will slow production causing shortages. Or they will go out of business like other refiners. China has kept the line on domestic prices that have exceeded the government's 4 percent annual target. Yet in February consumer prices rose only 3.2 percent the smallest increase since June 2010.

While the Saudis are sending extra barrels of crude oil to the US, the Energy Information Administration reported that U.S. crude oil imports last year were both the lowest since 1999 and the first time they had fallen below 9 million bpd since 1999. The EIA U.S. crude oil imports during 2011 fell to their lowest level in twelve years and were down 12% from their peak in 2005, as higher domestic oil production and decreased consumption of petroleum products reduced American refiners' purchases of foreign crude. U.S. crude oil imports averaged 8.9 million barrels per day (bbl/d) in 2011, down 3.2% (0.3 million bbl/d) from the year before. Imports of crude oil fell below 9 million bbl/d for the first time since 1999, according to full-year trade data in EIA's February Petroleum Supply Monthly. Since reaching a peak of 10.1 million bbl/d in 2005, oil imports are down 12%, or 1.2 million bbl/d.

Purchases of imported crude oil have declined because U.S. refiners had more supplies from domestic crude production to use, particularly higher oil output from Texas and North Dakota's Bakken formation. Texas oil production last year reached its highest level since 1997, and North Dakota appears to have pushed past California in December as the third biggest oil producing state.

I'm going down to Cushing, going to have myself a time. Friendly faces everywhere humble folks without temptation. Going down to Cushing gonna leave my woes behind. Ample barrels day and night people shouting Howdy neighbor! Heading down to Cushing gonna see if I can't unwind. I like pipelines that are already working. Come on down to Cushing and meet some friends of mine. President Obama is heading down to Cushing Oklahoma to talk energy and to try and take credit for the production of oil that his administration really opposed. While standing in the way of the only pipeline of consequence that he had to decide on he will try to talk about the revisal of the Seaway pipeline that will open up the bottle neck.

Robert Campbell at Reuters reports that inventories of crude oil at Cushing, Oklahoma, the delivery point for West Texas Intermediate crude oil futures are almost certain to set a new record high within weeks before trending lower in the summer. But the key question is how fast will stocks fall. In spite of fears last summer that stocks might continue to mount at Cushing, the North American oil market engineered a big draw down in supplies. A repeat of this trick looks harder this year. Even with the Seaway pipeline due to start around June 1, Cushing is likely to have a big stock overhang through the summer.

This situation may well come even as the rest of the oil market scrambles to build stocks amid mounting geopolitical fears. Indeed Cushing illustrates all too well the fact that proximity to demand is as important as the size of stockpiles when if they are to have much influence over global oil prices. To get an idea of how things might play out at Cushing this summer, a look back at 2011 is warranted. Last year Cushing stocks rose from 34.5 million barrels at the end of 2010 to peak just shy of 42 million barrels by mid-April, growing at an average pace of 267,000 barrels a week over 14 weeks. Stocks then fell from through the end of the year at an average pace of 332,000 barrels a week. The decline was more pronounced in the mid-April to end-of-August period, when Cushing stocks fell on average by 441,000 barrels a week. Now things look more challenging. Over the first nine weeks of 2012 weekly Cushing stocks have risen on average by 1.479 million barrels.This huge build has come despite Midwestern (PADD 2) refineries processing more oil this year. From January to mid-April 2011, PADD 2 refineries processed an average of 3.271 million barrels per day of crude. So far in 2012 runs have averaged 3.466 million bpd. A direct comparison with the first nine weeks of 2011 is a bit more favorable, but even so runs are nearly 150,000 bpd (or 1 million barrels a week) higher in 2012 than in 2011. In other words, Cushing stocks have risen at a pace five times faster than last year even as regional refineries have processes significantly more crude oil. Considering that last summer's drawdown at Cushing came as PADD 2 refinery runs averaged just over 3.5 million bpd for much of the second half of the year refineries alone will not be enough to replicate last year's performance. Indeed, it even suggests that in the absence of the Seaway pipeline Cushing stocks may well have continued to build this year. And if that is the case, the initial impact of the Seaway reversal on Cushing stocks may be limited.

Yet the situation at Cushing might not be as dire as the foregoing analysis suggests. For instance Cushing stocks are rising rapidly as a percentage of overall PADD 2 crude oil inventories while overall stock levels lag 2011. In fact a closer look at the behavior of PADD 2 stocks shows a strange dynamic. Huge builds at Cushing are outweighing large declines elsewhere in the region. Or, to look at this from another perspective, the amount of free storage capacity elsewhere in PADD 2 is rising rapidly. On the assumption that the terminals outside of Cushing can hold at least as much oil as they did last April when non-Cushing PADD 2 stocks hit a record, at least 5 million barrels of tankage is free outside of Cushing. In other words, crude is being pushed out of storage in other parts of PADD 2 and ending up in Cushing. This is likely due in part due to the quirks of pipeline rules that have encouraged physical oil traders to move more crude into Cushing than they might have normally done. So it's not the case that Cushing is a last resort place to store oil yet. Traders are not filling up Cushing because there are no other places in PADD 2 to store crude. More space is opening up elsewhere for crude to be stored, if necessary. If Cushing prices get sufficiently depressed, regional traders will almost certainly opt to store oil away from the hub if possible. Regional refinery runs should also tick higher as maintenance wraps up, particularly at refineries connected directly to Cushing, like CVR Energy's Coffeyville, Kansas plant. And with a number of new rail terminals in North Dakota set to start service in the second quarter, the supply side of the equation may not be as bad as it is right now in a few more weeks. Even so, it seems likely that any drawdown at Cushing this summer will be much smaller and slower than the 2011 drawdown even with Seaway, especially if any unplanned refinery problems crimp regional demand. A major change at Cushing is unlikely until the Seaway expansion, which will add some 250,000 bpd of southbound capacity, is completed in late 2012 or early 2013.

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_________________________ Phil Flynn Research Division 806 W. Washington Blvd. Chicago, IL 60634 312 563-8344 / 800 935 6487

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