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256 comments on DrumBeat: December 7, 2006

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Robert Rapier on December 7, 2006 - 11:47am Permalink | Subthread | Parent | Comments top
Too often the markets don't make sense to me. But the trend of gasoline inventories over the past month can't continue. I wrote a short piece on this last night.

Inventories are crashing, and demand is up. So, what are the options? Do you 1). Raise prices and have people cry conspiracy; 2). Keep prices steady and start rationing gasoline; or 3). Just risk having lower inventories?

In my opinion, higher prices are inevitable (and they have been trending higher). But I would have thought after yesterday's surprising inventory draw, gasoline futures would have spiked.

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Leanan on December 7, 2006 - 11:56am Permalink | Subthread | Parent | Comments top

The last page of the perpetual inventories thread at PO.com has some interesting discussion.

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Robert Rapier on December 7, 2006 - 12:15pm Permalink | Subthread | Parent | Comments top
That last poster had it right. This has been turnaround season, which is usually a period of light demand. However, we had record demand this turnaround season, which drew inventories down. The surprising part to me is that refinery utilization was back up over 90% this week, and inventories were still down.

However, gasoline doesn't get into the system as soon as refineries come up. So, next week may be a better indicator. If refining capacity stays above 90% and gasoline inventories are still falling, buy gasoline futures.

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neuroil on December 7, 2006 - 1:34pm Permalink | Subthread | Parent | Comments top
coefficient of correlation between API and finished gasoline stock on the monthly data from EIA=0.81. This doesn't mean that decreasing API is the cause of the decrease in finished gasoline stock but it could contribute to the problem. The current upgrading of the refinery units should fix the problem but I hope total capacity is sufficient for an ever increasing consumption.
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Calorie on December 7, 2006 - 12:24pm Permalink | Subthread | Parent | Comments top
I'm not a conspiracy theorist, but if the oil companies allowed spot shortages to develop, that might help them prove their point that the price mechanism must be allowed to work to properly allocate gasoline and prevent such shortages in the future. That could spark a public debate about which is more (or less) palatable: high prices or spot shortages.

One thing they could do would be to run an advertising campaign calling for increased conservation. (Chevron is already doing this to some extent via http://www.willyoujoin.com). Think they'd every do that on a large scale?

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Robert Rapier on December 7, 2006 - 12:44pm Permalink | Subthread | Parent | Comments top
I'm not a conspiracy theorist, but if the oil companies allowed spot shortages to develop, that might help them prove their point that the price mechanism must be allowed to work to properly allocate gasoline and prevent such shortages in the future.

But how could they "allow" these spot shortages, given the transparency of the refinery utilization number? That has been one of my main points in this argument. Refinery utilization, and the demand numbers are publicly available. They show that demand for this time of year is at record levels. Refinery capacity is pretty much maxed out as it is, and then you have huge demand in turnaround season. I certainly don't need to appeal to any shady business to explain what's going on.

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westexas on December 7, 2006 - 12:57pm Permalink | Subthread | Parent | Comments top
I think that you also have to consider the expectation in the gasoline markets that for hurricane damage to refineries, which did not come to pass, and which probably accelerated the downward trend in gasoline prices.

Having said that, as Robert knows (and has acknowledged), I have been predicting for some time a renewed bidding war for declining exports in the fourth quarter.  

I think that we are in the very early stages of an epic collision between expectations of exponentially declining imports into the US with the hard cold reality of exponentially declining world exports.  

US total petroleum imports have been increasing faster than consumption because of the combined effects of declining domestic production and increasing domestic consumption.  

At this precise point in time, 12/06, I estimate that Saudi oil exports are declining at about twice the rate that their oil production is declining--13% versus about 7%.  

So, the world's largest importer is expecting an exponential increase in imports, while the world's largest exporter is showing an exponential decline--as the HL model predicted--in exports.

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toilforoil on December 7, 2006 - 1:33pm Permalink | Subthread | Parent | Comments top
"I think that we are in the very early stages of an epic collision between expectations of exponentially declining imports into the US with the hard cold reality of exponentially declining world exports."

Did you mean rising imports?

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westexas on December 7, 2006 - 1:41pm Permalink | Subthread | Parent | Comments top
Yes--my mistake

Should be:

"I think that we are in the very early stages of an epic collision between expectations of exponentially increasing imports into the US with the hard cold reality of exponentially declining world exports."

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manmax on December 7, 2006 - 3:53pm Permalink | Subthread | Parent | Comments top
Having said that, as Robert knows (and has acknowledged), I have been predicting for some time a renewed bidding war for declining exports in the fourth quarter.  

Weren't you speaking about oil imports? (and not gasoline ones)

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westexas on December 7, 2006 - 4:29pm Permalink | Subthread | Parent | Comments top
For the US, I've been focusing on total petroleum (crude + product) imports.
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manmax on December 7, 2006 - 5:00pm Permalink | Subthread | Parent | Comments top
yeah, but these were up until last week..
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westexas on December 7, 2006 - 5:14pm Permalink | Subthread | Parent | Comments top
http://tonto.eia.doe.gov/dnav/pet/hist/wttntus24.htm
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manmax on December 8, 2006 - 3:19am Permalink | Subthread | Parent | Comments top
sry, my bad, hadn't not understood TOTAL oil + product
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Calorie on December 7, 2006 - 6:53pm Permalink | Subthread | Parent | Comments top
But how could they "allow" these spot shortages, given the transparency of the refinery utilization number?

I wasn't suggesting they restrain production. I was suggesting that they simply refrain from raising the retail price of gasoline. This would stoke demand, put downward pressure on gasoline inventories, and in the extreme, could result in spot shortages. Then they could say, "look, we are running maxed out and we still can't adequately supply the market, therefore we must be allowed to raise prices to restrain demand and prevent shortages." I'm assuming here that oil companies have a fair amount of control over the price that their gas stations charge their customers.

A few spot shortages here and there would probably go a long way into softening up the public into accepting higher prices.

Another way to look at this is that the oil companies view raising prices (to restrain demand) as a last resort because of public outrage, political scrutiny, charges of gouging, etc. Under that scenario, they're still holding out hope of the supply-demand imbalance correcting itself without the need for higher prices, and they are willing to take the risk that comes with running the gasoline system at lower inventory levels.

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oilmanbob on December 7, 2006 - 9:33pm Permalink | Subthread | Parent | Comments top
Calorie, its an interesting suggestion, but extremely  unlikely to be tried. The oil marketers have a duty to their stockholders to maximise profits. The CEO's stock options depend on a rising stock price. How well would that go over with the board of directors? Would Wall Street consider that crazy behaviour and depress the price of the stock?
  The sales of gasoline are divided between too many companies-about 60% is at convenience stores, 40% at the integrated oil gas stations. If they all "conspired" causing shortages it would be illegal as well as illadvised..It would be a violation of the antitrust laws.
  So please, lets keep this conspiracy theory quiet. Karl Rove might get a job in the oil patch!
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thegoodshipkship on December 7, 2006 - 10:56pm Permalink | Subthread | Parent | Comments top
Note that refinery utilization is back over 90%, so cranking up the refineries is out.
Why?

Do you mean that 10% of our 9.x mbd capacity could not cover the draws or that for some reason that 10% is inaccessible presently?
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Robert Rapier on December 7, 2006 - 11:57pm Permalink | Subthread | Parent | Comments top
You can't get much better than 90% because something is always undergoing maintenance or having maintenance problems. In the winter it's worse. I would imagine an annual average uptime is no better than 90%. I have seen some weekly levels higher, but that's not usually sustainable for long.
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thegoodshipkship on December 8, 2006 - 10:35am Permalink | Subthread | Parent | Comments top
So in reality we have an effective utilization of roughly 100%.  
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Robert Rapier on December 8, 2006 - 12:45pm Permalink | Subthread | Parent | Comments top
At the present time, yes. But lots of refineries are undergoing expansions. Capacity will creep up over time. The question is will it increase fast enough to meet growing demand? That is the immediate problem I see. Peak Lite.
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Essex Land Rover Man on December 9, 2006 - 11:14am Permalink | Subthread | Parent | Comments top
Sorry to question an oil refinery worker, but looking at the EIA percentages ( Refinery utilization ) but between May 26th and September 22nd 2006 refinery utilization (RU) didn't drop below 90% and if you look at 2004 winter figures (2005 hit by hurricanes) then between 5th November 2004 and February 18th 2005 RU didn't drop below 90% either.

It just seems odd to me that RU is not climbing back to its usual 9x% rate. If refineries are back normal as much as possible as you are suggesting, then there is about a (93 - 90=) 3% reduction (in very simple terms) in what the EIA figures should imply in the next couple of months. From being just able to cover gasoline and distillate supply in the US with ordinary import levels, it looks like the US will have to import more than average or suffer small but persistant stock withdrawals.

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256 comments on DrumBeat: December 7, 2006

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