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Brazil Watch: Petroleo Brasileiro S.A. (NYSE:PBR) union workers threaten five day strike. This can really rally crude. This is not a "warning strike," as it has the specific purpose of cutting oil production. The problem is wages (again), talks have "broken down", and the strike, while not a certainty, will take some time to get off the ground -- giving CNBC plenty of time to call your attention to it. The last time they did this was 2001, and Brazil was forced to import extra oil at the time. Brazil is the 8th largest oil consumer in the world, and currently consumes all it can get out of the ground and a little bit more. Obviously, the threat of this strike will be supportive of crude, and to a lesser extent gasoline prices into the weekend.

Gonu Update: Weakening. Continuing to weaken. Probably shuts the Strait of Hormuz for up to two days. No facilities damage reported or likely to be reported as it heads toward Iran, whose loading facilities are located in the Persian Gulf and not in the Gulf of Oman. Here's an article on Gonu coming ashore in Oman that reminds me of that "Deadliest Catch" show on the Discovery Channel: "Cyclone Gonu battered Oman's coast Wednesday with fierce winds and torrential rains..." The author later points out that little actual damage has been noted.

More Gonu Hype: Another Gonu story talks about "winds lashing Iranian islands" and 220 knot winds when the storm had already been downgraded to a Cat 1 in it's opening paragraph, but concludes with this little tidbit: "All Iranian offshore oil platforms in the Persian Gulf are working based on their schedule without any interruption," Bahram Narimanian, spokesman of Iran's Offshore Oil Company, said. "However, we have prepared for any possible difficulty." Comment: The MSM (mainstream media) world has become dominated by drama queens.

Cracking Yesterday's Oil Report

An odd report. Massive build in gasoline stocks with slightly lower production and slightly higher demand. Hmmm. A rise in blending components is to blame, but the refinery utilization number really got cracked, while production of both gasoline and distillates were barely lower on the week. Puzzling math there EIA.

  • Crude: 100,000 barrel build, just on the low side of expectations. I continue to expect oil prices to receive support from a combination of higher international prices (due ostensibly to low OECD inventories) and refiner demand here. Notably, imports picked up after the sharp drop last week.
  • Gasoline: 3.5 million barrel build. more than double expectations that called for a 1.5 to 1.6 MM barrel build. The surprise jump in gasoline stocks resulted in the y/y storage deficit shrinking from 5.4% to 4.2%. From the chart below you can see that the gasoline stocks situation, while by no means in "safe" territory, is quickly righting itself.

Gas stocks 07 06 2007

  • Utilization fell to 89.6%. This is a pretty big drop, and it muted the impact on RBOB during the day (although not on the refining sector which suffered its largest one day drop in recent memory). Gasoline production however dipped only 36,000 bopd to 9.222 mm bpd.

Gas Production vs Utilization 07 06 2007

  • Imports continued to run high at 1.5 mm bpd, off just 100,000 bpd from the prior week, but still very close to a record.
  • Demand ...UP? Pretty counterintuitive. The EIA's demand numbers fall out of an equation that includes four-week moving averages and don't count the import of blend stocks. Pretty suspect. Either way, the number was only slightly larger and in no way reflected the "holiday driving surge" in demand some had been expecting.

Gas Demand 07 06 2007

  • Days supply -- first time in (I can't remember how long) that this indicator has risen. Ok, I counted the dots on the following chart. It looks like this is the first noticeable uptick in 17 weeks.

Oil days supply 07 06 2007

  • Distillate: up 1.9 million barrels. Again, more than double expectations. The entire build was attributable to diesel, and CNBC was quick to point out that traders are worried about a possible shortage of heating oil next winter as the reason for the recent strength in distillate prices. Last week it was a strong economy and more trucks on the road, and one month ago it was a late start to the corn planting season which had a surge of tractors in the field. Once a bull, always a bull.

To be fair, higher sulfur content distillate stocks are low right now, and the 500 ppm variety hasn't seen a build in many weeks as refineries are busy cranking out Ultra Low Sulfur Diesel as promulgated by the EPA since 10/06. Refiners were required to produce 80% ULSD.

The old stand, Low Sulfur Diesel, was 500 ppm ... the somewhat oddly labeled LSD. Bearing that in mind, it's not surprising to see a dearth of the dirtier stuff around. So it's a structural thing with the lack of one type, LSD, being made up for by an abundance of the other Ultra LSD. As such, heating oil prices look like this:

Heating Oil 7 6 07

You might be tempted to think that ULSD prices were low, given that there is quiet a bit of it around, but sorry -- that's not the case either.

Natural Gas Report Day

My expectation: 90-100 Bcf injection. This would bring the y/y storage deficit down from 8 to 7%. I'm way out on a low limb this week, as most estimates appear to be concentrated between 105 and 115, with some higher numbers. Given the drop in imports and an increase in cooling-load induced demand, I don't see it. Since analysts are setting the mark pretty high this week, I'd say the over/under for gas is at least 105. My numbers would certainly be seen as bullish, and would serve to keep gas over $8.

Imports -- gross imports fell 1.4 Bcfgpd from the prior week

  • LNG dipped a bit to 2.8 Bcfgpd, down 0.5 Bcfgpd from the prior week's number. Obviously the drop has nothing to do with price, but is almost certainly logistical in nature. Maybe the harbors were too crowed with pushy gasoline tankers. LNG still ran 0.6 Bcfgpd high to year-ago levels.
  • Canadian pipeline imports declined as well falling to 8.0 Bcfgpd, down 0.9 Bcfgpd from the prior week. Despite occasional fits of rising imports like the last two reports, this situation is only going to get worse.
  • Weather -- heating up

    • Cooling Degree Days hit the high of the year at 44. Still nothing compared to summer but it made many more AC units come on for the first time this year.
  • Heating Degree Days fell to 6 from 20 in the prior week. Note to Al: this is far warmer than normal.
  • Meanwhile, the forecast: It's getting hot in here:

    Getting Hot 07 06 2007

    Ahmed Watch: Iran has built over a 1,000 small attack craft armed with "anti-cruise" missiles (read zodiac rubber boats with outboard motors and a guy at the bow with an RPG), apparently with the idea of disrupting traffic through the Strait of Hormuz by using swarming, Kamikaze style tactics designed to overwhelm the defenses of the U.S. Navy. Two words for long range: Daisy Cutter. One word for close range: Phalanx.