This Week in Petroleum 10-24-07

Whoa! The analysts missed this one by a mile. Here were the predictions, prior to the release of the report:

Analysts surveyed by Dow Jones Newswires on average predict crude inventories rose 300,000 barrels during the week ended Oct. 19, and Vienna’s PVM Oil Associates also noted that “expectations for this week’s U.S. oil inventory data are for a rise in crude oil stocks.”

However, some analysts predict a decrease of up to 2 million barrels. Analysts also predict the EIA report will show refinery utilization rose 0.3 percentage point; gasoline supplies, still near record lows, rose 1.1 million barrels; and distillate stockpiles, which include heating oil and diesel, rose 200,000 barrels.

Here’s what they got:

U.S. commercial crude oil inventories fell by 5.3 million barrels compared to the previous week. At 316.6 million barrels, U.S. crude oil inventories are near the upper end of the average range for this time of year. Total motor gasoline inventories decreased by 2.0 million barrels last week, and are at the lower end of the average range.

Both finished gasoline inventories and gasoline blending components fell last week. Distillate fuel inventories decreased by 1.8 million barrels, and are at the upper limit of the average range for this time of year. Propane/propylene inventories increased 0.6 million barrels last week. Total commercial petroleum inventories decreased by 7.9 million barrels last week, but are in the upper half of the average range for this time of year.

I suspect crude will be off to the races again. I had called a (short-term) top on front-month WTI a week ago at $89, and in fact oil was down almost every day since then. But this inventory report will provide a lot of fuel for the bulls for another week.

Here is the rest of the report:

U.S. crude oil refinery inputs averaged 14.9 million barrels per day during the week ending October 19, down 183,000 barrels per day from the previous week’s average. Refineries operated at 87.1 percent of their operable capacity last week. Gasoline production rose compared to the previous week, averaging nearly 9.0 million barrels per day. Distillate fuel production fell last week, averaging 3.9 million barrels per day.

U.S. crude oil imports averaged 9.1 million barrels per day last week, down 1,305,000 barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged 9.9 million barrels per day, or 414,000 barrels per day less than averaged over the same four-week period last year. Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 838,000 barrels per day. Distillate fuel imports averaged 235,000 barrels per day last week.

Total products supplied over the last four-week period has averaged nearly 20.8 million barrels per day, up by 0.4 percent compared to the similar period last year. Over the last four weeks, motor gasoline demand has averaged 9.2 million barrels per day, or 0.2 percent below the same period last year. Distillate fuel demand has averaged nearly 4.3 million barrels per day over the last four weeks, up 1.0 percent compared to the same period last year. Jet fuel demand is down 3.3 percent over the last four weeks compared to the same four-week period last year.

It is going to be a close call on the $1,000 bet. I do believe the fundamentals for higher oil prices are generally worse now than they were 3 months ago. Peak driving season has passed, OPEC is already pumping more crude, and prices have had a dramatic run-up. On the other hand crude inventories, while still high, have been pulled down, and gasoline inventories continue to hover near record-low levels. But, the sentiment has certainly turned in favor of higher oil prices. And the sentiment of the market can move it quite a bit in a short period of time. You can see some of the analysts on CNBC – after having missed out on most of the run-up – have now moved their clients into oil and so are talking up the price.

But the recent fast run-up in prices, followed by OPEC’s decision to pump more crude, would make me very cautious about buying oil at this level. You might make some money, but it is a much bigger risk than it was earlier in the year when the fundamentals for higher oil prices looked better (at least to me). Of course over the long haul, I am bullish on oil prices and have been for 5 years. I thought $100 oil in 2008 was likely, but a move from $60.77 (the crude price the first week of January) to $100 in a single year would be unprecedented.

I would also add just a bit on refinery utilization. Analysts had predicted utilization to come up this week. Generally, refineries are coming out of their turnarounds now, and you would expect to see utilization at a higher level at the end of October. But you have to take the current crack spreads into account. When crack spreads are at $30/bbl, as they were earlier in the year, you do everything you can to maximize your utilization rate. If that means paying overtime, or paying extra to have equipment fabricated and delivered quickly, you do it. Money is not an object; you get your refinery up and running as quickly as possible.

But when crack spreads are $5/bbl, as they are now, you don’t do those things. You still want to have your refinery up and running, but it doesn’t make economic sense to go all out to boost your utilization. That $5/bbl margin will disappear pretty quickly if you throw money around. So, utilization rates will be less robust in times of low margins. It has absolutely nothing to do with inability to secure crude – as some have suggested. It has everything to do with economics. But given where gasoline inventories are currently setting, I don’t expect margins to stay soft for long.

5 thoughts on “This Week in Petroleum 10-24-07”

  1. Whoosh. It is ugly out there. A bull market. With a BM, you never know how it is going to come out, but sooner or later it will dump.
    But when?
    Right now, the hedge funds rule. They have leveraged hundreds of billions of dollars at play in the markets. Oil shortages? How, when even now we are above five-year averages in stocks?
    BMs often go on much longer than investors think they should. Buffet got out way early back int he 1990s. Soros shorted the dollar way soon, The fundamental may be obvious, but the marte rules, no one else. This market right now is in the bull mode (BM). Step aside or get crapped on.
    How high will it go is the question. I am sensing now mid $90s. Bush bombing Iran could make it go higher, as some sort fo skirmish in Iraq-Turkey.
    I still say at some point int he future oil will crack, and it could fall hard. But I thought that a year ago. Oil Thug states are very strong. There may even be a backward bending supply curve. Oil is so high now, Thug States do not have to worry about maintaining fields, hiring experts etc. The thug mentality is not about proper maintenance, property rights and trade relations etc. If oil hits $90, the thugs may just build bigger mansions and brothels.
    So, fields decline, and thugs make even more. This is Mexico, Venezuela, Libya, Iran and Iraq, Russia, former SU states, KSA and more.
    Ouch, a backward bending supply curve could last for years.
    Peak Demand is here, but will it be enough to sink oil prices?
    I think so, but I am losing resolve.

  2. Peak Demand is here, but will it be enough to sink oil prices?
    It is? What is happening in China? India?

    Even if Peak Demand did happen, would it outrun falling supply from Thug Oil?

    Even if that happened, any resulting fall in oil price would stimulate more oil use, i.e. the end of Peak Demand.

    I’m with Robert: the long term outlook is for higher oil prices. About $120/bbl next year?

    Sadly Thug Oil has us by the short and curlies for the foreseeable future.

  3. The 9.1m bpd crude oil import number is very low for this time of year — no wonder inventories fell. On the one hand it makes sense to cut back on imports when prices spike, on the other hand our cutback had little effect on world prices, so someone is soaking up the oil we didn’t import. Are new economies finally outbidding us for oil? Remember, oil is not as expensive in terms of their currencies.

    US consumption data seems to support the “being outbid” thesis. In May I projected US gasoline demand in 2007 would grow 2.4 billion gallons over 2006. Of this, 1.6b gal would be ethanol and 0.8b gasoline from petroleum. But demand growth slowed markedly around June/July and actually dipped into negative territory the last few weeks. It now looks like 2007 US gasoline demand may only grow 0.6b gal over 2006, and full year petro gasoline usage will actually decline 1.0 billion gallons.

    A decline in petro gasoline is also bearish for crack spreads. Too early to tell if this is the cause of the recent crack spread collapse vs. a seasonal fluctuation. But it’s possible the US hit “peak demand” early this summer. Of course global demand shows no sign peaking so far.

  4. Interesting comments, Doggy!
    US total gasoline consumption is what ~150b gal/year. You are going to need pretty accurate data to tell whether it grew with 0.8b gal or fell by (a full) 1.0b gal.

    Also, is it time to revise the projected 1.6b gal growth for ethanol?

    As you imply, what happens in the US will become less important as worldwide events begin to dominate.

  5. As doogy’s bark suggests, we are seeing Peak Demand.
    But Optimists asks the right question: Can Peak Demand Beat Thug Oil?
    I say no for now. The thugs are happy with a backward bending supply curve. And, they are not long-term planners, industrious plotting out their future. The thug states got rich by piggybackng on Western workers and knowhow.
    The inetersting thing about Peak Deamdn is that it can g o one for quite some time. Our experince in the 1980s suggests the globe can acheive, say 2 percent annual declines, in demand for 10 years or more.
    Sooner or later, falling demand will beat the thugs. But it could be years.

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