2nd Update:
The gasoline supply situation in the U.S. is just about unprecedented, and for April it is unprecedented. If I go back to 1991 (as far back, it appears, as the EIA maintains a statistic on “days of supply”) then this week’s inventory is the 7th lowest out of 842 weeks. The lowest 6 all happened at the end of summer driving season (late August and early September). In other words, 99.2% of the time we have been in a better inventory situation than we are in right now. More importantly – again going back to 1991 – we have never had inventories this low in the month of April; just when we need to be building supplies for summer.
Last week I went out on a limb and said this week or next week gasoline inventories would turn up. My limb is starting to crack. Something has to give soon. We could be headed for record high prices to reign in demand a bit. Just hope for a mild hurricane season this year.
Update:
Another surprise this week on gasoline inventories. That is a decline for 11 weeks in a row, and right now we should building inventories for summer driving season. I expect the price rise to continue:
U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) rose by 2.1 million barrels compared to the previous week. At 334.5 million barrels, U.S. crude oil inventories are in the upper half of the average range for this time of year. Total motor gasoline inventories fell by 2.8 million barrels last week, and are well below the lower end of the average range. Distillate fuel inventories remained the same, and are just below the upper end of the average range for this time of year.
This puts us into pretty uncharted waters. I will update just how uncharted in a bit. For now, here’s CNN’s take:
EIA characterized gasoline stocks, which have fallen 13 percent since early February, as being “well below the lower end of the average range.”
The gasoline situation doesn’t look likely to improve soon.
The report said refineries, operating at below normal capacity over the last several weeks due to fires and other problems, ran at 87.8 percent capacity last week, down from 90.4 percent the week prior and lower than expected.
And gasoline demand remains strong. EIA said demand over the last four weeks rose by 2.3 percent. The average rate of growth is 1.5 percent.
“It’s a one-two punch,” said John Kilduff, an energy analyst at Man Financial in New York. “It’s very troubling on the gasoline side. We just can’t keep up, given the strong demand.”
——————–
On a “days of supply on hand” basis, if I go back to 1991 – which is 841 data points, this week’s days of supply on hand is the 12th lowest during that time. In other words, in the past 16 years, 98.5% of the time we have been in a better gasoline inventory situation then we are in now. I would also point out that in April, over that same time frame this is the lowest day’s supply on hand that we have had. The 2nd lowest? You guessed it. The week before. So, this is not a typical situation. (But I will go out on a limb and say that within 2 weeks the gasoline inventory trend will reverse direction).
If you look back historically, this is usually about the time in April when refineries are coming back online, and the winter vapor pressure turnover is complete. So, gasoline inventories usually start to build near the end of April. But, as I pointed out last week, we are in an unprecedented inventory situation for this time of year, and demand remains very high.
Early predictions are in for tomorrow’s report:
Oil prices drift in narrow range
Traders were also anticipating the midweek petroleum supply report from the United States, which is expected to show that crude oil inventories fell by 1.2 million barrels on average, according to a Dow Jones Newswires survey of analysts’ estimates.
Ritterbusch thinks markets will be more closely watching gasoline stockpiles than crude inventories.
“The highs in gasoline are tending to prop up crude oil,” Ritterbusch said. “Supplies are still low, historically.”
Gasoline stockpiles will likely increase by about 200,000 barrels and distillate stockpiles, which include heating oil and diesel fuel, are seen growing by 400,000 barrels, the survey showed.
That sounds about right to me. I think gas inventories go up this week or next week. If we have another surprising multi-million barrel draw, gasoline prices are really going to take off because we will be entering unfamiliar waters. I will update this after tomorrow’s report is released.
CNN Money:
“Big Oil’s Money Machine”
CNN Money:
“Big Oil’s Money Machine”
From that article:
“Are we getting any bang for our buck with record gas prices?,” asked Tyson Slocum, energy program director at Public Citizen, a national consumer advocacy organization. “They aren’t building any new refineries. If they’re not going to translate the high prices into investment for the consumer, why should they be allowed to charge high prices?”
It is hard for me to believe that Tyson Slocum is this misinformed. It costs a lot less to expand existing facilities than to build a grass roots refinery. So, while no new refineries are being built, capacity is being expanded every year at about the rate of 1 new mid-sized refinery. I am shocked that Slocum does not know this.
Cheers, Robert
It is hard for me to believe that Tyson Slocum is this misinformed.
Not hard to believe at all. I’ve run into Mr. Slocum in the past. While decrying energy companies’ lack of investment, Public Citizen actively opposes new energy investment. They are against pretty much everything, nuclear, coal, opening new areas for energy development.
I find it hard to believe that anyone takes Mr. Slocum and Public Citizen seriously.
I wanted to address the “tax breaks” issue. Large corporations can invest their capital anywhere in the world. When making investment decisions they look at the after tax cash flows and risks relative to their alternatives (which could include increasing dividends, reducing debt, or buying back stock).
The US Mineral Management Service was trying to entice energy companies to make some very risky investments in the deepwater Gulf of Mexico. Without tax and royalty relief, these blocks would not likely have been developed. Had the development not proved to be commercially viable, the energy companies would have shut down further investment and walked away from the projects. If the development proves commercial, the companies pay at least SOME royalties and taxes (albeit less than they would have on some other leases). Some payment is better than none, so the U.S. government is better off than it would have been without the tax breaks.
There are two ways to look at the taxes and royalties. Tyson Slocum and Public Citizen look at the normal tax rates and royalties that apply to other leases and say that energy is getting a “subsidy”. You could also consider that the US government is getting a “windfall” of taxes and royalties that it would not have received under those same rules.
I guess that Public Citizen is advocating returning premiums paid at federal lease sales when companies don’t find commercial quantities of oil and gas? Probably not.
There is a seperate question about some missing contract provisions for high oil prices in the final contracts.
If they’re not going to translate the high prices into investment for the consumer…
One thing I rarely see mentioned: Imports. Looking at the data just published on the EIA website, we made 8.5M barrels of gasoline last week, and imported over 1.1M barrels of gasoline. That’s over 10% of our supply being refined overseas, mostly in Europe.
My understanding is that Europe has a surplus of gasoline because they have a lot of diesel cars, and their refineries are not set up to get the maximum amount of diesel possible from a barrell of crude. They have two choices: export the extra gasoline to the US, or install equipment in their refineries to increase the diesel yield. As long as prices in the US are attractive, we’ll continue to get gas from Europe.
Gasoline is a global market. When prices rise in the US, it pulls supply from Europe and increases the price there too!
Be careful when adding gasoline imports and production from the weekly data. Blending components get counted as supply when they are blended into making finished gasoline, and are then counted as “production”. So to get a real sense of how much supply was added in a given week, you need to add the production to the conventional gasoline import figure (and exclude blending components imports). Otherwise, you are including blending components twice (once when they are imported and again when they are blended into making finished gasoline).
Doug MacIntyre
Senior Oil Market Analyst, EIA
Doug, what’s your sense on the inventory situation? If I go back to 1991, this is the worst situation we have ever ever been in with gasoline inventories going into summer. I really expected inventories would turn up this week.
Cheers, Robert
Robert,
Inventories are very low, no one can doubt that. On a Days Supply basis, the situation is even worse. That said, there are 5 weeks until the Memorial Day weekend (the unofficial start of the peak driving season). The bottom end of the average range at the end of May is 208.6 MMB, or about 14 MMB above where we are right now. So, we would need to see an average build of 2.5-3.0 MB each week over the next 5 weeks just to get back to the bottom end of the average range. Is this possible? Yes. Is it likely? I better leave that answer to others. But we need to see imports stay high and start seeing more gasoline production (from higher crude refinery inputs), which means we can’t afford to continue seeing more refinery outages, if we have any chance of reaching that target at all.
By the way, I would have expected to see inventories increase as well.
Doug,
Thanks for taking the time to give your thoughts and clarifications.
The EIA’s weekly inventory figure for April 21 last year shows total gasoline stocks of 200.6 MMB. Today’s report shows 208.2 MMB.
I’m assuming the difference is due to monthly revisions. If so, how confident are you that today’s 194.2 MMB is accurate and won’t also be revised significantly upward? Also, are you aware of any current directional bias on gasoline inventory revisions?
RR Says:
We could be headed for record high prices to reign in demand a bit. Just hope for a mild hurricane season this year.
Why? The public is in deep denial (encouraged by the media and the supply-side apologists) about the seriousness of oil situation and the feasibility of replacing declining supplies with “unconventional” sources. Nothing gets the public’s attention like a swift kick in the wallet.
Granted, high gas prices now are only indirectly related to peak oil and related long-term issues. Also granted that very high gasoline prices could do serious damage to both the economy and to policy, and hamper our ability to adapt. But I would much rather face high gas prices, that are not caused by a global shortage, now.
A carbon tax would be a better way to supply the necessary economic pain, but since that seems politically infeasible, I’ll take what I can get. At least it will give us a preview of much higher prices that will come later, when demand permanently outpaces supply, and perhaps some intelligent action will be motivated by the immediate pain.
Robert, has that limb you’ve gone out on started to crack?
Have you bumped up your Peak Oil DEFCON level from 3 to 2?
Have you bumped up your Peak Oil DEFCON level from 3 to 2?
Understand, though, that this is not a peak oil issue. At the moment, crude inventories are building. The problem is that refineries are having lingering maintenance problems, and demand remains at all time highs. If you look at the EIA report, you will see that crude imports are running above the levels of a year ago, and you probably saw that China is also importing record amounts of crude. So, we aren’t experiencing a crude shortage.
Cheers, Robert
To FTX,
Yes, the difference between the weekly data reported for April 21, 2006 and tha data reported this week for April 20, 2006 is due to monthly revisions. To calculate stocks a year ago, we interpolate between monthly data. In other words, in this case we look at the monthly data at the end of March and at the end of April, draw a straight line between the two data points, and pick the point on the line that corresponds to April 20. We do this because it is comparing data based on the best available data at the time (weekly data this year and monthly data last year). But comparing weekly data to weekly data has some validity too.
More importantly, we are not aware of any bias in the monthly data revisions. Remember that stock data are not an average but a single point. When we report data for April 2007 at the end of June, the monthly data will reflect what stocks were as of April 30, 2007. But no, I can’t tell you that the gasoline stocks being reported on the weekly right now will be revised up when the monthly data comes out.
Doug,
I’m somewhat embarrassed that I didn’t just look at your monthly data and LERP between March and April to see how the revisions were applied. All the same, it’s good to get an official confirmation.
Many thanks for your reply – much appreciated.
Although the days of supply data runs out in 1991, it looks like there is monthly data going back to 1981, here and here. (I am assuming that your figure for “total stocks” is finished gas + blending components. Is true?)
Although this isn’t as interesting as days of supply, it still seems worth looking at. If we assume that our total average consumption has not gone down since 1981 (which seems reasonable, but correct me if I’m wrong), then we can at least assume that higher historical stocks mean more days of supply than we currently have.
Looking at that information with those assumptions, it looks like the current situation is in fact unprecedented at least as far back as 1981.
Two other interesting things come out of these numbers. Stocks look like they were quite high throughout 1981, despite the high gas prices at the time. That’s curious.
Also, I can see that 1997 is the only time in the last 26 years in which we had less than 200 Mbbl in stock in April. Yet I don’t recall 1997 being a particularly bad (or good, depending on your point of view) year for gas prices. Does anyone know what happened that year?
Also granted that very high gasoline prices could do serious damage to both the economy and to policy, and hamper our ability to adapt.
GE, do expand. What would you call “very high gasoline prices”? $10/gal? $15/gal? IMHO it needs to head to the business side of $25/gal before it starts to “hamper our ability to adapt”.
But tell us what you think, and why. As always some real numbers help to build a convincing argument.
A carbon tax would be a better way to supply the necessary economic pain, but since that seems politically infeasible, I’ll take what I can get.
The current (and previous) Congress does a great job to encourage my Libertarian leanings. Let’s keep the government out of it, as much as possible. The free market will do a great job, in spite of rants by idiots like Slocum.
Optimist,
In answer to your question, I don’t have a definitive number with any good basis. It’s just intuition that that threshold is out there somewhere. My gut says that we could probably technically survive $25/gallon, but that we would hit a destructive level of public hysteria and economic contraction at a much lower price, say $10-15/gallon. Serious hardship for the lower income brackets would start at around $5/gallon, and it’s hard to know what the second-order effects of that would be. But a great deal depends on other factors, like how quick the price runup happens, and what other fuel sources are doing at the same time.
GE, I know – projecting the future is inherently difficult.
I would point out, though, that not so long ago, the consensus was that at $3/gal would destroy the economy. Now it appears that we barely notice $3/gal anymore.
Humans are amazingly adaptive, and high gas prices may just prove how innovative we can be…
Over on the WSJ energy blog it is noted that 4 week average gasoline production is 500,000 higher than last year, but we’re (200.6 – 194.2 =) 6.4 million below last year in inventory. All by itself, would that extra 500k catch us up? In how many weeks? 12.8 weeks? Is that observation really useful?
by itself, would that extra 500k catch us up? In how many weeks? 12.8 weeks? Is that observation really useful?
The observation is not really useful, because it ignores the demand side, as well as the import side. What we have seen is that even though production appears to be running higher on that 4-week average, inventories continue to get pulled down. So, we can’t ever catch up with that kind of situation. Last year imports came through big in May. If they don’t do so this year, we could easily see $4 gasoline. (Well, the U.S. could. Yesterday I paid just over $7 a gallon here in Scotland).
Cheers, Robert
I would point out, though, that not so long ago, the consensus was that at $3/gal would destroy the economy. Now it appears that we barely notice $3/gal anymore.
I had certainly heard that opinion advanced, but I would not have called it a consensus. The major concern, I think, was not that $3/gallon would destroy the economy, but that it would panic the markets, which isn’t quite the same thing (a primarily psychological, rather than a primarily economic, effect).
Robert,
I was hoping you would comment on the inventory links that I posted a couple of days ago, with the monthly data back to 1981. Am I looking at the right data here?
Am I looking at the right data here?
You are looking at the right data. What’s missing is the demand number, which would enable the days of supply calculation. I don’t know that this number is available, which is why we can’t easily calculate days of supply prior to 1991.
Cheers, Robert
Would you agree that it’s probably safe to assume that our absolute demand (i.e. total, not per-capita or per-$GNP, etc) has increased since 1981?
Also curious: The totals for the early 80’s seem to be generally higher on average (low to mid 200’s across the board) than more recent values. Is there a reason for this? Does this reflect an increasing level of economic efficiency (in the same sense that “just in time” manufacturing is more efficient)?
The totals for the early 80’s seem to be generally higher on average (low to mid 200’s across the board) than more recent values. Is there a reason for this?
Probably reflects more total refineries at that time, and therefore more storage capacity. Even though refiners have expanded capacity, they are pretty reluctant to build new tanks.
Cheers, Robert
Robert,
[or anyone else who can answer this]
Can you explain to an outsider how much processing is actually required to transform imported ‘gasoline blending components’ into finished gasoline?
What I’m really asking is whether refinery outages materially inhibit this transformation i.e. if 0.7 mbd of gasoline imports are blending components, does it make any difference if refinery capacity is running at 89% as opposed to 96%? Or is it the case that such imports are to all intents and purposes ‘finished’ save for the simple addition of (say) ethanol?
What I’m really asking is whether refinery outages materially inhibit this transformation i.e. if 0.7 mbd of gasoline imports are blending components, does it make any difference if refinery capacity is running at 89% as opposed to 96%?
Turning imported blending components into gasoline is a piece of cake. The refinery does not need to be up to do the blending, but this will of course mean that the components are being drawn down. But typically when refineries are down for maintenance the blenders can still run (until they run out of blendstock).
Cheers, Robert
Re: Turning gasoline bending components into finished gasoline
Included in the production data on our weekly survey is not only gasoline made at a refinery, but also finished gasoline made at blender terminals that took blending components (e.g., RBOB) and turned it into finished gasoline. This is why you might appear to get a higher yield than you might expect if you take our finished gasoline production data and divide it into the refinery gross input number.
Doug MacIntyre, EIA
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