Some investors in global and emerging market funds are starting to become nervous that such markets have risen too far, too fast (see Asian Investor article). After a nice run since early March, investors in emerging market funds that are tracked by EPFR Global have seen investors pulling a net $1.87 billion out of Asia ex-Japan, Latin America, Europe, Middle East, Africa, and diversified global emerging markets equity funds as of June 24th. High-yield bond and global equity funds also saw their string of consistent inflows stop, with the funds flowing into money market and U.S. bond funds. The reversal of flows has been driven in part by investor worries as to when foreign demand for manufactured goods and commodity exports will increase. Russia and Brazil equity funds, which are commodity dependent, are also posting new outflows.

As a few examples, the yearly charts for both EEM (iShares MSCI Emerging Markets Index) and the EFA (iShares MSCI EAFE Index ETF) reflect some of this indecision in the second half of June, but the trends are not unlike what has been observed in the S&P 500 Index over the same period.

Source: Bigchart.com

This slowdown in the bullish trend comes just as the International Energy Agency cut its expectations for medium-term global oil demand (see Financial Times article), with the recession diminishing the medium-term risk of a supply crunch as the spare capacity cushion remains healthy. Natural gas storage is also up (see EIA article) and above the 5-year historical range.

Yet, not everyone appear as cautious or nervous, with many analysts and traders still bullish (see SeekingAlpha articles here and here and here). In addition, as hedge funds are near completing one of their best starts of the year since 1999, many managers expected capital to continue to flow into their funds, especially those funds that are focused on emerging markets (see The Australian article). Given that many emerging market funds are commodity driven, then next few weeks/months should be telling as data on the summer driving season, housing, and currencies markets will help signal if the commodity correction has indeed arrived (see SeekingAlpha article), and whether or not emerging markets will continue their recent strength.

There is an excellent opinion article in the Wall Street Journal today by Arthur Laffer (see WSJ article). In the article, Laffer discusses the increase in the monetary base, and how in the past 95% of the monetary base was composed of currency-in-circulation. Even with the recent unprecedented increase, cash-in-circulation has risen only 10%, now making up less than 50% of the monetary base, whereas bank reserves have increased nearly 20-fold. Granted, an increase in bank reserves was needed as a result of the liquidity issues of 2008 in order to make it possible for banks to begin lending again, but the balance has shifted too far. Laffer points out that banks will no doubt continue to make loans until they are once again reserved constrained. Currently, as banks make more loans and put more money into the system, the growth rate of M1 (currency in circulation, demand deposits, and travelers checks - see wikipedia article) is now around 15%. This of course will result in higher inflation and higher interest rates. As mentioned by Laffer,

"In shorter time frames, the expansion of money can also result in higher stock prices, a weaker currency, and increases in commodity prices such as oil and gold."

Does this market situation seem familiar? Unless the Fed acts to reduce the monetary base, which appears unlikely anytime soon given that there is no easy approach or outcome (see the Laffer article), it appears likely that the Fed will continue to lose control over rates (see previous post), and the markets will continue to tip towards inflation (see additional previous post). Plan accordingly.

Once again we have a weak dollar helping to push the price of crude oil even higher (see Bloomberg article, see first WSJ article on crude, second WSJ article on the dollar). In the CNBC video below, the technical analysts Nicole Elliott is absolutely beside herself, and even giddy at times, regarding the absurdity of the move in 2-year U.S. Treasuries. She eventually comes to the conclusion that the central banks have lost all control of the setting of interest rates, not to mention the long bond and interbank loans which have been outside of their control for a while.

Source: CNBC Video
Yet the 44.4 basis point move between June 5-8, along with the recent move in the Fed funds rates, are being dismissed by some firms that trade directly with the Fed, implying that it is simply speculators that are driving rates up (see Bloomberg article). Many dealers go on to predict that the Fed will hold tight well into 2010. Maybe so, but does it matter? While the Fed has recently retreated from seeking debt-issuing power to help control inflation (see Bloomberg article), the markets certainly are nervous about what they are seeing, regardless of the policy and wishes of the Fed. The TIPS market has also been active (see previous post).

Of course, what many traders are seeing and are nervous about begins with the unprecedented amounts of cash that is flowing into the world economies, much of which will eventually trigger higher inflation, higher taxes, and lower profit margins. To make matters worse, there is a feeling that much of the spending and printing is not necessary, and even worse, that no one at the Fed is really even minding the store. For instance, in the YouTube video below, one politician questions the Inspector General of the Federal Reserve. During the questioning, the Inspector General seems to have no idea where the trillion-plus dollars the Fed has put into the system actually ended up, or who received the money. There also seems to be no postmortem or investigation on the impact of not bailing out Lehman Brothers, or auditing of any off-balance sheet transactions.


Source: YouTube
Given the market reactions, the inflation-driven moves are beginning to appear a little more obvious (see excellent Michael Pento greenfaucet post), even if the size and timing are still under debate. Yet the moves can happen quickly. Just ask those trading the 2-year Treasury, or those who were looking to lock-in to a 30-year mortgage under 5 percent just a few weeks ago. This certainly seems encouraging for commodities long-term, and even short-term, regardless of the current rallies. Just think if demand actually catches up?

Universa Investments L.P., run by Mark Spitznagel (with no ownership, but a significant investment from Black Swan author Nassim Taleb), is opening a new inflation fund, named the "Black Swan Protection Protocol - Inflation" fund (see WSJ article). While worries that inflation will be caused by increased deficit spending are nothing new (see recent blog post), the fund is making bets on what is expect will be hyperinflation - similar to, and possibly worse, than what was observed in the 1970s. Investments in the aptly named fund will include options tied to what are believed will be volatile commodities, such as corn, crude oil, and copper, in addition to associated stocks, such as the gold miners and oil drillers. The inflation fund is also making negative bets on Treasury bonds in expectation of higher yields and lower bond prices. While most investors believe that the economy will have to deal with inflation at some point, the timing is still a matter of debate. Given the use of options in the fund, which in the past tended to be deep-out-of-the-money puts when looking for a sell-off, it would seem that Spitznagel and Taleb are looking for a much quicker and, in this case, higher move to the upside for assets tied to inflation.

T. Boone Pickens, who as of last November had holdings in 26 energy companies within his BP Capital Management, now holds shares in nine companies as of its latest filing (see Bloomberg article). The fund fell an astonishing 97 percent during the final three months of 2008, declining from $1.29 billion to around $40 million. As for individual holdings, BP Capital reduced exposure to Occidental Petroleum, Transocean, and Suncor Energy, while selling all of its holdings in Schlumberger and Halliburton. The fund added shares of Chesapeake Energy and Peabody Energy.

A commodity analysts at Goldman Sachs is expecting a "swift and violent rebound" in energy prices during the first half of this year, with prices expected to rise to $65 a barrel (see Bloomberg article). The analyst also believes that the strategy of using supertankers to store crude oil to take advantage of the contango trade (see previous post) is “near the end of this process,” believing that the contango will likely flatten as OPEC and other producers cuts supply, decreasing the availability of cheaper crude oil for immediate delivery. OPEC in particular is beginning another round of cutbacks, with cuts expected to fall somewhere between 3-4.2 million barrels a day, help to meet a goal of reducing production to under 25 million barrels a day. If OPEC is able to continue with planned cuts, current crude oil and gasoline prices should find a bottom and show some strength. Whether the move is sustained after any "violent" snap back will certainly depend on the health of the US economy later this year - in particular how the economy responds to the proposed stimulus plan, as well as how both inflation and the dollar react to additional borrow and spending/taxes. Given the size of the proposed stimulus plan, along with previous TARP spending, both inflation and a weaker dollar seem poised to help support higher crude oil prices over the next year.

Crude oil is currently in contango as futures are trading at a significant premium to spot prices (see WSJ article). As of yesterday's close, spot prices were around $43 a barrel as May futures were trading near $50 a barrel. Unfortunately, to profit from the difference, you need to store the crude somewhere, yet the number of available tankers is decreasing fast. In fact, demand is causing shipping prices to rise nearly 50 percent recently, causing a increase in the Baltic Dirty Tanker Index.

Banks are continuing to ask for more collateral to back past hedge fund lending, causing more funds to liquidate their positions (see WSJ article). When added with investor redemption, bank-induced liquidation is forcing hedge funds to step-up their deleveraging. Such selling is continuing to put pressure on the market, generating more requests for bank collateral and investor redemption, in what amounts to a catch-22 that continues to spiral the market downward. Such selling has been occurring for a while, as funds have been unwinding exposure to financial and energy stocks, both of which continue to suffer as crude oil continues to drop, and the credit crisis continues to unfold. While Hedge Fund Research recently reported that the level of hedge fund market exposure has decreased by one-third over the last year, I suspect that this still may not be enough. As mentioned by Antonio Munoz-Sune, head of the U.S. for fund of funds EIM: "The combination can take anyone down." Unfortunately, it is difficult to tell where we are in the hedge fund closing and deleveraging process, with many hedge funds still appearing to use every rally as an opportunity to sell. I suspect that until we see the VIX approach more normal sub-30 levels, stop seeing the DJIA and S&P 500 Index post intra-day percent swings in the high single digits, and see crude oil stop falling in price, it is unlikely that the market will stop feeling the effects of hedge fund selling, allowing for a long-term and lasting rally. Like most bottoms, we won't know for sure that it has occurred until we see it in the rear-view mirror, but I will be watching the VIX, the price of crude oil, and the Dow Jones and S&P 500 index percent swings for clues.

A combination of falling crude oil prices and falling US and world equity markets has caused stocks over the last four days to lose almost a quarter of their value in Dubai and 17 percent in Saudi Arabian markets, just less than a week after there was an expectation that these markets were immune from the financial problems in the West (see Washington Post article). Some stress that the problems in the Gulf are more structural, with the lack of transparency and information resulting in the markets being impacted more by unsubstantiated rumors and panic selling. Nonetheless, the level of exposure is still believed to be significant. Losses from sovereign wealth fund investing in the US and elsewhere are yet to be disclosed, but are expected to be significant, causing many funds and their capital to sit on the sidelines as the credit crisis to unfold.

Just as crude oil hits a seven month low, closing a little over $91 a barrel yesterday, Petrobas announced that it broke its own monthly record for domestic production, now producing almost 1.9 million barrels per day in August (see Business Week article). No word yet whether George Soros had lighten up on his initial $811 million stake in the company after it was down 28 percent on recent falling crude oil prices (see previous post). If crude oil prices continue to fall (they are rallying back this morning), the expensive off-shore oil production may begin to generate fewer profits than expected, even with production increases.

It should once again be an interesting week for crude oil. It appears that Hurricane Ike shutdown 19 percent of refining capacity, causing analysts to predict that gasoline may once again rise to $4 per gallon on average if the outages start to approach a month or longer (see Bloomberg article). While some refineries escaped damage, extensive power outages and closed transportation and shipping lines will make it difficult to return to normal operations quickly. While gasoline prices were on the rise late last week, the effect on crude oil was a little less certain. On Friday, as the storm was still in the gulf, crude oil traded below $100 a barrel for a short time before finally closing above $102 a barrel. Crude oil has recently been looking for reasons to go down as it has sold off after reaching prices in the $140s a just a few months. Whether the current disruptions in the gulf and the recent breaking and bouncing of crude oil prices off the psychological barrier of $100 will help to reverse the slide in crude oil (which has been selling-off even on good news), should become a little more clear as the week progresses. Rumors of funds liquidating various commodity positions, aided by speculators now taking short positions (see previous post), have been given as reasons for the recent slide in crude oil and commodities in general. This week may give an indication of how strong the selling is, and whether some funds will take any run-ups in crude prices as an opportunity to sell into strength. Taking some production off-line, even a small amount, should help to signal the current level of strength of the crude oil market. If this current development is shaken-off in short order, crude oil bears may in fact see the $80 a barrel price they have been predicting. This week should provide a little more clarity, but then again, with crude oil this seems to be a popular refrain.

Commodity index investors (ie, speculators) sold $39 billion worth of crude oil futures between the July market peaks and September 2nd, a time that saw a rapid sell-off in crude oil prices (see Independend.ie article). The analysis was once again done my Michael Masters, president of Masters Capital Management, who recently blamed speculators for driving up prices. The drop also comes at time when the IEA is forecasting lower demand, and pension and hedge funds are unwinding commodity positions, each of which have put pressure on prices. In the end, such debate may be academic as to whether we call those selling speculators (be it hedge funds, pension funds, index funds, or individual traders). Given the exposure we all have to pensions and index funds (even us retail money mortals), we all might be classified as speculators, notwithstanding the evil mustache-twisting monopoly banker image. Of course, all this talk says nothing as for whether speculators are even inherently bad for the markets in whole (see US News & World Report blog). After all, who is going to take the other side of the position when a company is looking to hedge its risk? If the market is rising or falling, will there always be the perfect number of textbook farmers and bakers on the other side of the wheat contract? Probably not. How many companies will show higher profits, or at least less loss, due to placing proper hedges? Raising margins to decrease leverage and unhealthy exposure is one thing, but making it more difficult for the market to even function is another. If we eliminate all trades and traders that don't actually plan to buy or sell the commodity, liquidity will decrease. If this does happen, individuals may find themselves living in a much riskier world, even if the price of crude seems a little less volatile day-to-day.

OPEC's recent decision to cut production may not have the impact that is usually expected (see NY Times article). Reports are that Saudi Arabian officials have assured world markets that they would ignore their own cartel members and continue to pump oil. While agreeing with the recent decision of OPEC to cut production, the Saudi's are concern that higher oil prices will not help the world economy, possibly causing a recession that would not only cause oil prices to collapse even further, but also speed-up the development of alternative energy sources. The 13 nations in OPEC control roughly 40-45 percent of the world's oil production (and hold roughly two-thirds of reserves), yet some large non-OPEC players in the space, such as OECD members and Russia, produce approximately 24 percent and 15 percent, respectively. The impact of the OPEC decision, especially when one of its members may be breaking ranks, may be less than might be expected, but with close to half of all production their impact is still worth paying attention to. Nonetheless, when an asset is selling-off, even on good (or at least bullish) news, then this also must be noticed. Oil is nearing the psychological $100 a barrel level once again. If this level is broken with any conviction, even in the face of possible production cuts, this would certainly be an interesting development for the entire market. Further selling pressure seems to be more of a reality at the moment, especially given the de-leveraging of commodity assets by various pension and hedge funds. Then again, as current markets have illustrated on a near daily basis, they have a tendency to change their mind pretty quickly, causing the shorts to also be quite nervous, regardless of their current bias. It is probably safe to expect continued volatility, but at this point it is not clear whether the recent decision by OPEC can reverse the recent sell-off.

Update: As a follow-up, the Times of London is also reporting that OPEC is continuing to work with Russia on oil production, scheduling another meeting for next month. Together, OPEC and Russia would produce about 50 percent of the world's oil, and could exert more influence when working together.

Update: Hurricane Ike is moving into the Gulf. A number of rigs and platforms are already being affected. Friday price action before the weekend should be interesting. Gasoline prices are jumping on the refinery impacts.

A new proposed SEC plan will overhaul oil and gas reporting rules that have existed since the 1970. The new rules will boost the proven reserves reported by oil companies, and in the process boost their shares and potentially increase interest in takeovers (see Financial Week article). The plans will essentially allow companies to book reserves from “unconventional” oil and gas sources, including oil sands and coal-bed methane. Some deep-water projects that to date have not been allowed to be described as “proven” will also now be included. Furthermore, firms will be able to publish data on what are called “probable” and “possible” reserves, where recovery is not as certain. The new rules obviously don't change the amount of oil and gas that is available worldwide, but they will help investors better calculate future cash flows and thereby place a proper valuation on a company. Needless to say, the oil companies are in favor of the new rules.

The plan will affect both U.S. and international companies that report under SEC rules, which often includes most of the larger international firms. Those with the largest non-traditional sources of future production are most likely to benefit. Analysts expect that Royal Dutch Shell is likely to benefit the most among the oil majors given that they are investing capital to retrieve crude from bitumen-soaked soil in Canada, as well as extract natural gas in coal beds in Australia and China, both of which can now be included as reported proven reserves. ConocoPhillips (COP), Exxon (XOM), and BP (BP) have also invested in non-conventional sources of oil. The reporting of non-traditional proven reserves could also have an impact on acquisitions and takeovers. As mentioned by Neil McMahon, analyst from Bernstein:

“We believe that these rule changes could be the catalyst for a wave of acquisitions, with those companies with the largest unproved resource bases making juicy takeover targets for some of the larger cash-rich majors.”

McMahon feels that Marathon Oil (MRO), with investments in oil sands and shale, and British gas producer BG, with its stakes in the deep-water Brazilian fields and a new 25% stake in Chesapeake Energy (CHK) and the Fayetteville shale, are potential targets. In fact, given that the changes will make the SEC rules more in line with European rules, the impact on UK-listed firms, among others, is expected to be positive.

The rule changes are likely to apply to 2009, and not 2008 year-end reporting since the SEC is still in a consultation period and has not committed to a time line for implementation. Given that the market is forward looking, share prices may nonetheless begin to see the impact of the proposed changes which are expected to be approved and put into place quickly.

It seems that Sovereign Wealth Funds (SWF) are accumulating cash, but are having a difficult time managing it. As mentioned in a recent Financial Times article, even some of the smallest SWFs, such as the Timor-Leste Petroleum Fund, have already grown to over $1 billion. Estimates put the total amount of funds globally at $3,000 billion. Although the larger established funds have managers with ties to the hedge fund world, some of the smaller ones do not, and are at times struggling to keep up. While the SWFs appear to be attractive due to the scale of the available capital, the fees can be quite low compared to traditional hedge funds that are used to a 2-20 structure.

The shear magnitude of the size of each fund, as well as the increasing number of funds, could be a shot in the arm for a few depressed sectors regardless of how they are managed. Traditionally the SWFs have been conservative investors, putting most of their money into fixed assets. As they start to look at longer-time horizons, they initially step into the global equity arena, and then begin to move to more illiquid assets, such as private equity and real estate. Look for this trend to continue, and look for the influence of SWF in helping to keep companies and depressed sectors a float to continue. Of note is that while the limited influence of SWF investments can help deploy capital to certain sectors of the economy, the funds are less likely to find their way into commodities, especially crude oil. Many of the SWF are funded from commodity and crude oil revenues and are looking for ways to diversify their holdings. Therefore, those areas with low correlation to commodities are the ones most likely to see the benefits from the capital these funds can provide.

We always hear about gold trades "ending in tears" due to the rapid swings of the yellow metal. As some are finding out, apparently gold is not the only commodity with a volatile price (see WSJ article). Declining prices recently have some commodity-specific hedge funds deep into negative territory. As an example, the Ospraie Fund has suffered from bad trades on energy and natural resources stocks, resulting in a loss of roughly $1 billion from a fund that had peaked near $3.8 billion in assets late last year. The fund declined more than 13% in July alone. Back in 2006 the fund lost almost 20% from bad trades attempting to guess the direction of copper prices. Yet before 2006 the fund had returned annual gains of around 18% since 1999. Just yet another reason that asset or fund returns should be compared against some type of reward-to-variability ratio, such as the Sharpe ratio or Treynor ratio, among others, to help determine if you and your portfolio can stomach the swings.

As reported at Bloomberg.com, George Soros purchased an $811 million stake in Petroleo Brasileiro SA (better known as Petrobras) in Q2. The Brazilian oil company is now the largest holding in his fund, amounting to 22 percent of the total $3.68 billion of stocks and American depositary receipts held by Soros Fund Management LLC. Of course, crude oil has taken a dive in the last month, helping to push Petrobras down 28 percent since his purchase and costing Soros's $235 million. I guess we would all like to be in a position to lose nearly a quarter billion dollars and still be "OK". Then again, if Soros holds tight, he could end up doing well.

While the timing for Soros may not be perfect for this trade, a number of other people are also betting on Petrobras. As quoted by Ricardo Kobayashi from UBS Pactual SA: "Petrobras has something that other oil companies don't have: oil - lots of it and they're going to find more. If you can buy now and hang on, if you have the staying power, it's great.'' As written in a previous post , estimates have the Tupi-area fields in Brazil costing between $200-$240 billion to develop, in part due to deepwater rigs causing $600,000 a day to rent, forcing Petrobras to look for capital. Yet the cost might eventually be worth it given that the offshore fields are expected to hold up to 50 billion barrels. Petrobras has already leased approximately 80% of the deepest-drilling offshore rigs (see post). They are also buying new rigs and production platforms. If oil prices stabilize, companies to consider would be Transocean (RIG), Nobel (NE), and Nabors (NBR), each of which have sold off with lower crude prices, but each of which are also near some key support levels. For longer-term investment, some capital-intensive E&P oil companies such as Exxon Mobil (XOM) should do well, even without direct investment. Of course, this all requires crude oil to stabilize, probably stay over $100 a barrel, and potentially continue its march higher. If not, you may be experiencing the short-term returns of Soro, and not necessarily the longer-term ones.

Commodities have fallen into Bear Market territory, down 21 percent as measured by the S&P GSCI Index (see Bloomberg article). Amazing, the bear market defined 20 percent or more move down has occurred since the July 3rd highs for the index, just a little over a month ago. Specifically, gold is off 22 percent from its recent highs, silver is down 33 percent, platinum is down 36 percent, and crude oil has fallen 23 percent. The move is certainly what you would call a serious short-term correction, and starts to make you wonder when and if a snap-back is going to occur, even if the move is just temporary. Nonetheless, the weak reaction of crude oil to the recent military issues in Georgia certainly makes one suspect that crude oil wants to go down further. It will be interesting to see how this plays out. The $110 and $100 prices should be the next interesting decision points for crude.

There is an interesting article in the WSJ regarding recessions and productivity numbers. As seen in the figure below, the last six recessions have occurred at a time when productivity numbers were decreasing (although the numbers were still positive for the last two recessions, and productivity was relatively strong during the most recent recession in 2001).

Source: Wall Street Journal
While productivity has averaged 0.8% over the last six recessions, it is currently growing at an annual average rate of 2.5%. This is important since high productivity numbers allow the Federal Reserve to keep interest rates lower than normal since higher prices are being matched with higher productivity, at least to some extent. As an example, if workers are making x% more of a product in the same amount of time, then wages can increase by the same x% and the per unit labor cost will stay the same. Simplistic, but you get the idea. Productivity gains were the key to the 1990s, and one of the reasons Alan Greenspan was often espousing the benefits of high productivity, providing yet another reason to keep interest rates low, sub-prime notwithstanding.

Of course, higher productivity can allow you to keep from hiring new workers, or even allow you to reduce headcount, since now you can do more with less. Furthermore, the current high productivity numbers may just be an artifact of the recent environment. Housing, which is a less productive industry, is currently being shifted out of while higher productivity industries, like those exporting, are increasing in emphasis. The weak dollar is also having an effect in amplifying the export-based productivity numbers. Given that the U.S. is trading overseas more now than in the past, the higher export productivity numbers make sense.

So, if productivity is not cooperating for those talking recession, what about other numbers in comparison to previous economic conditions, such as the stagflation days of the 1970s that many analysts are comparing the current conditions to? Given higher energy costs, producer price increases for finished goods are worse now than during the 1970s, causing lower consumer confidence and higher levels of consumer credit as a percentage of GDP. The savings rate is down, as it has been for a while, and the number of vacant homes is increasing.

Yet, all is not bad, or falling off a cliff. The ISM index is hovering about the benchmark contraction / expansion levels, and disposal income has still not collapsed, even with increasing job losses. Industrial production, while flat, is also not severely contracting. Furthermore, core CPI (without food and energy) is not excessive, nor is core PPI. The unemployment rate, while rising, is also not yet close to approaching high single and low double digit levels. High productivity is keeping unit labor cost down (as discussed before), and wages have stayed in check for corporations. After-tax corporate profits as a percentage of GDP are also still good, and long-term Treasury yields are not excessive in comparison to the stagflation years.

So in short, is the picture rosy? No. But are we heading for another decade of stagflation with sustained lower growth and high inflation? Right now the data does not point to this conclusion, regardless of the continued comparisons. Housing and crude oil still seem to be ruling the day, the fallout of which is affecting nearly everything in the economy. When the former finally turns around, and the later sells off with conviction, we may be able to finally get rid of both the "stag" and "flation".

Recent EIA weekly data shows that total products fuel demand in the U.S. decreased, averaging 19.9 million barrels a day last week (a Bloomberg article also mentions that Japan imported 0.7% less crude oil in June than one year ago). U.S. demand has now declined for three straight weeks, with U.S. fuel consumption averaging 20.3 million barrels a day over the past four weeks, down 2.1% from a year earlier. U.S. crude oil refinery inputs averaged 15.1 million barrels per day last week, down 355,000 barrels per day. Refineries operated at 87.1% capacity last week, down 2.4%, marking the lowest utilization rate in over two months. Gasoline production increased, averaging 9.2 million barrels per day, while distillate fuel production decreased, averaging 4.6 million barrels per day.

Crude oil inventories were down 1.6 million barrels to 295.3 million barrels. Stockpiles were forecast to only decline by 675,000 barrels. While Hurricane Dolly turned out to not be as bad as initially worried for on- and off-shore Gulf refineries, some energy companies nonetheless evacuated select oil rigs as a precaution, cutting Gulf production by 4.7%. Total motor gasoline inventories increased by 2.9 million barrels last week. Distillate fuel inventory, including diesel and heating oil, increased by 2.4 million barrels. Commercial petroleum inventories increased by 1.9 million barrels last week.

Crude oil imports to the U.S. averaged 9.8 million barrels per day last week, down 985,000 barrels per day. Total motor gasoline imports averaged 1.1 million barrels per day last week, while distillate fuel imports averaged 102,000 barrels per day. Over the last month, motor gasoline demand has averaged 9.3 million barrels per day, down by 2.4% from last year. For the same period, distillate fuel demand has averaged about 4.2 million barrels per day, up by 3.6%, while jet fuel demand fell 2.5%.