The U.S. Energy Information Administration (EIA) released its weekly petroleum status report Wednesday morning, showing that U.S. commercial crude inventories decreased by 4.7 million barrels last week, maintaining a total U.S. commercial crude inventory of 490.6 million barrels. The commercial crude inventory remained in the upper half of the average range for this time of year.
Tuesday evening the American Petroleum Institute (API) reported that crude inventories rose by 1.6 million barrels in the week ending July 14. API also reported gasoline supplies decreased by 5.5 million barrels and distillate inventories increased by 2.9 million barrels. For the same period, an S&P Global Platts survey of analysts had consensus estimates for a decrease of 3 million barrels in crude inventories, a decrease of 700,000 barrels in gasoline inventories, and a rise of 500,000 barrels in distillate stockpiles.
Total gasoline inventories decreased by 4.4 million barrels last week, according to the EIA, and remain in the upper half of the five-year average range. U.S. refineries produced about 10.1 million barrels of gasoline a day last week, down by about 400,000 barrels a day compared to the prior week. Total motor gasoline supplied (the agency’s proxy for demand) averaged about 9.7 million barrels a day for the past four weeks, down by 0.8% compared with the same period a year ago.
Platts oil futures editor Geoffrey Craig points out that the spread between the front-month contract and the second-month contract has narrowed to 19 cents in July. That is, a barrel of oil for August delivery is just 19 cents cheaper than a barrel purchased for September delivery. The spread on the six-month contract is $1.11.
Craig spells it out: “A narrowing contango removes the financial incentive for traders to store crude in Cushing and could force more barrels out of tank.” Contango refers to a market position where prices for nearby delivery are lower than prices for future-month delivery.
With no financial incentive to hold barrels in storage, this week’s decline in inventory levels makes sense. Now the question is, will this go on or is this week a one-time event? Stay tuned.
With little or no incentive to pay for storing oil until prices rise, traders are more likely to sell their barrels. If that happens on a broad scale, the market flips into what the industry calls backwardation, where prices for nearby delivery are higher than prices for future-month delivery. There has not been a prolonged period of backwardation in the crude market since October 2014, just after the steep drop in crude prices began.
Before the EIA report, benchmark West Texas Intermediate (WTI) crude for August delivery traded up about 0.6% at around $46.67 a barrel and jumped to around $47.05 (up 1.4%) shortly after the report’s release. WTI settled at $46.40 on Tuesday and opened at $46.25 Wednesday morning. The 52-week range on August futures is $42.06 to $58.30. Within half an hour, oil had given back all but about 15 cents of its gain.
Distillate inventories decreased by 2.1 million barrels last week and have moved near the upper limit of the average range for this time of year. Distillate product supplied averaged over 4.1 million barrels a day over the past four weeks, up by 9.9% compared with the same period last year. Distillate production averaged over 4.9 million barrels a day last week, down about 400,000 barrels a day compared with the prior week’s production.
For the past week, crude imports averaged 8 million barrels a day, up by about 386,000 barrels a day compared with the previous week. Refineries were running at 94% of capacity, with daily input averaging over 17.1 million barrels a day, about 125,000 barrels a day less than the previous week’s average. Analysts were looking for refinery usage of 95% for the week.
According to AAA, the current national average pump price per gallon of regular gasoline is $2.268, up a penny from $2.258 a week ago and down 2.5 cents per gallon compared with the month-ago price. Last year at this time, a gallon of regular gasoline cost $2.201 on average in the United States.
Here is a look at how share prices for two blue-chip stocks and two exchange-traded funds reacted to this latest report.
Exxon Mobil Corp. (NYSE: XOM) traded down about 0.1% at $80.53 in a 52-week range of $79.26 to $95.55. Over the past 12 months, Exxon stock has traded down about 15%.
Chevron Corp. (NYSE: CVX) traded up less than 0.1%, at $103.71 in a 52-week range of $97.53 to $119.00. As of last night’s close, Chevron shares are down about 2% over the past 12 months.
The United States Oil ETF (NYSEMKT: USO) traded up about 0.8%, at $9.62 in a 52-week range of $8.65 to $12.00.
The VanEck Vectors Oil Services ETF (NYSEMKT: OIH) traded up about 0.9% at $25.47 in a 52-week range of $23.63 to $36.35.
PRICE OF OIL IS UP
The Boeing Co. (NYSE: BA) last week solidified its position as the best performing stock among the 30 equities included in the Dow Jones Industrial Average (DJIA). The stock added 3% to its yearly gain last week and now posts a year-to-date bump of 33.93%.
Three other Dow stocks have posted year-to-date gains of more than 20%: Apple Inc. (NASDAQ: AAPL) is up 28.68%; McDonald’s Corp. (NYSE: MCD) is up 27.57%; Visa Inc. is (NYSE: V) is up 24.24%.
Boeing’s Friday boost came after a premarket rating upgrade from J.P. Morgan. Analyst Seth Seifman raised the aerospace giant’s rating from Neutral to Overweight and lifted Boeing’s price target from $205 to $240. Boeing had broken the prior target on Tuesday.Seifman called aerospace market fundamentals “positive” and likes Boeing’s focus on going after the services market. He also liked the company’s prospects for improved free cash flow and earnings.
Even the fact that Boeing canceled three orders for the 747 last week didn’t hurt the stock. The cancellations were the last of four orders from bankrupt Russian carrier Transaero. Two of the planes had already been built and are now parked in California waiting for a buyer.
Boeing said earlier this year that it planned to cut 747 production to just six per year. Following these last cancellations, Boeing’s backlog of 747s dipped to 17, enough to keep the line running for another two and a half years.
Boeing stock closed at $208.51 on Friday in a 52-week range of $126.31 to $208.73, and the high was posted Friday. The 12-month consensus price target is $196.79.
MARKET CAP $500 BILLION
GOAL IS SMOOTH
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Aba Dhabi's state oil company said Monday it was looking to publicity list parts of its businesses on the United Arab Emirates equity markets and would seek international partners as part of its drive to expand operations. Abu Dhabi National Oil Co which is know as Adnoc and produce most of the 2.9 million barrels a day of output in the UAE will expand its partnerships into refining and petrochemicals as well as other areas such as pipelines and storage. It already has ventures with international companies such as BP and Total SA at its main oil and gas field. BP and Total had each paid $2.2 billion for a 10% stake in an onshore oil concession with Adnoc
Adnoc plans to list minority stakes in some of its services businesses across the oil and gas industry , through initial public offerings on local equity markets but the UAE governmetn will not sell stakes int the company itself, as neighboring Saudi Arabia is planning to dow with its tate oil firm The statement did not specify which units would be listed or give a time frame for the plan
ABU DHABI WEIGHS PUBLIC LISTINGS
BOEING STOCK UP
JULY NEWSLETTER 2
Facebook Inc. (NASDAQ: FB) reached an extraordinary milestone as its market cap rose above $500 billion, and it closed at over $499 billion on Friday. It is now worth more than Amazon.com Inc. (NASDAQ: AMZN), which has a market cap of $488 billion. Unlike most other companies in the top tier by market cap, Facebook is only a little more than a decade old.
Facebook moved ahead of Amazon because Wall Street was impressed by its earnings while Amazon’s were disappointing. Facebook’s revenue increased 41% in the second quarter to $9.2 billion. Net income was $3.9 billion, up 71% from the same period a year earlier. Its profit margins are breathtaking. Amazon is by far the larger company. In its most recent quarter, revenue rose 25% to $38 billion. However, its net income was only $197 million, down $857 million from the same quarter a year ago. Its core e-commerce businesses lost money. The bottom line was rescued by its cloud business, known as Amazon Web Services (AWS).
It is hard to make the case that Amazon is anything other than a wild success. That does not keep Wall Street from its anxiety about its bottom line. Facebook does not face similar criticism.
If market cap is anything, it is a measure of investor voting about a company’s future prospects. Facebook has no competition. It has 1.3 billion members worldwide. Its revenue growth rate will be over 50% for the next several quarters. There is a case to be made that its revenue will hit $100 billion in less than three years. Its profits at that point could be $30 billion. That would make it one of the half-dozen most profitable companies in the world.
Amazon proponents make the case that one of its advantages is its extraordinary innovation. Its Prime membership services have created a bond of loyalty with millions of customers. It is ready to deliver packages with drones. Amazon’s buyout of Whole Foods Market puts it squarely into the huge U.S. grocery market. And, although AWS has little relationship with the company’s core e-commerce business, it is the leader in the cloud sector. Facebook does not have a second promising business. However, investors obviously believe its single core business is enough to create extraordinary value.
Second-quarter earnings were a watershed for both Amazon and Facebook. Each dominates its industry. The issue is how keeping that dominance costs each of them on the bottom line.
The U.S. subsidiary of BP plc (NYSE: BP) said on Tuesday that the company is considering a plan to create and spin-off a master limited partnership (MLP) of its U.S. midstream operations. The initial assets being considered for the spin-off include the company’s pipelines for transporting crude oil, refined products, and natural gas in the Midwest and on the Gulf Coast. BP expects to make a decision by the end of this year.
According to BP’s U.S. website, the company owns about 3,500 miles of pipeline and transports more than 1.3 million barrels a day of petroleum and natural gas. That’s a pretty small total when compared with the 50,000 pipeline miles of Enterprise Products Partners and the 84,000 pipeline miles claimed by Kinder Morgan.
But what a spin-off would do is generate some sorely needed cash for BP. At the end of the first quarter the company reported cash and equivalents of $23.8 billion, a sizable war chest, to be sure. Operating cash flow of $4.4 billion did not include amounts related to the 2010 Gulf of Mexico oil spill. Including that, operating cash flow totaled $2.1 billion.BP plans to spend $15 to $17 on capital projects this year and expects to divest $4.5 to $5.5 billion in assets. BP also expects to pay $4.5 to $5.5 billion for the 2010 oil spill this year.
First-quarter divestments totaled just $300 million from a single sale of a North Sea pipeline, so the company needs to pick up the pace. And selling midstream assets has not been easy. BP failed to reach a deal with Enbridge last year for a portion of BP’s Gulf of Mexico offshore system.If BP does spin off its U.S. pipelines, the British firm would be the spin-off’s general partner, own 100% of the incentive distribution rights, and own a majority of the limited partnership units of the new company. Currently the company does not separately report midstream activity, so its not possible to make a guess as to what the pipeline company may be valued at.
One thing is certain though: it’s been a tough year so far for pipeline operators. The Alerian MLP Index is down about 4% for the year to date, compared to a gain of nearly 10% in the S&P 500.
PIPELINE SPIN OFF