This Week in Petroleum 10-24-07
Posted by Robert Rapier on October 24, 2007 - 6:00pm
Topic: Supply/Production
Tags: eia, gas inventories, gas prices, oil inventories, original, twip [list all tags]
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.
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. (The real irony is that the primary risk factor I saw with respect to the bet - the potential for falling Saudi production - has not been an issue. Saudi production has been steady all year, and is now set to rise). 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 (although they are at about the same level they started the year at), 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.
http://science.reddit.com/info/5z1pc/comments/
thanks! :)
Q. Why, given that crude has been in 'surplus' for some time now, and gas has been in 'short supply' is the crack spread so low?
Is there a graph showing crack spread over time? I'm sure it's been declining, and staying low, for far longer than what I'd have thought the market would establish.
What forces am I missing from my understanding?
Cheers...
--
Jaymax (cornucomer-doomopian)
1 reason is that the 'perception' of scarcity may cause a permanent increase in desired stockpiles.
Another reason is that there may be plenty of crude but the highest quality, light sweet is making up a smaller % of the total inventory than it used to
I wouldn't call it a "perception" of scarcity: oil stocks are at their lowest level since January 5. (http://www.bloomberg.com/apps/news?pid=20602013&sid=a5u8mxvWrbWI&refer=c...)
Gasoline stocks are at their lowest level since March.
In the meantime, China's been delaying filling its strategic reserves, waiting until the price fell for the season. And Asian airlines have been delaying hedging their fuel supplies, waiting for the price to fall.
So, there is plenty of pent-up demand to keep prices high.
In addition, Bodman is still filling the SPR in November, and reservations for tankers for November are still way below normal.
WTI spot was over $89 this afternoon.
Right, for the first three trading days following the experation of the old front month contract, the WTI Cushing spot and the WTI NYMEX front month furures are disconnected. The November contract expired Monday the 22nd. That means that Tuesday, Wednesday and Thursday (tomorrow) the futures close and the spot close is disconnected. But Friday, the futures must close at the closing spot price. (Don't ask me how the Cushing spot market and the NYMEX work this out because I haven't a clue. But those are the rules.)
At any rate today the Cushing spot closed $2.00 above the NYMEX December contract. Friday they will close at the same price. Anyone willing to guess at what that price will be?
That being said, this is the "off season." That is this is the lull between the hot summer and the cold wintea and also a lull in the driving season. This is a time when the demand should be lowest and supply should have no trouble keeping up. Yet this does not seem to be the case. Supply is falling way behind. There seems to be something going on here.
Ron Patterson
You have no idea what demand is. Nobody does. Supply is falling way behind?
Falling way behind what? How far is "way behind?"
Yes, let me help you with that. You don't have any idea what is going on, but you are attempting to enlighten us anyway.
Start by admitting that there is no imaginable way to accurately/meaningfully measure current oil demand. That even in retrospect it is a guess based on estimates of available supply.
Just a suggestion...you're coming off as arrogant and contemptuous. If you have legitimate argument with methodologies, premises, or conclusions reached here, there are plenty of big brains that visit this site who would be willing to consider and engage your ideas. Leading off with abuse just makes you look like an ass.
I thought Darwinian was a Big Brain. I assumed his usual arrogance, contempt for those who disagree with him, and abuse of anything that he doesn't understand were proof of that.
I have a very legitimate argument. I have several. Which one were you interested in? And pertaining to what?
Did you want to know the price of crude tomorrow? The chance of War with Iran? What color to shade your perfectly symmetrical bell-curve showing oil-production dropping to zero within a few years?
Thanks for the advice. You know what would be cool? If you could write a few sentences admonishing this "Slippery Slope" fellow who responded to me just below, calling me a troll. Abuse? right?
For some reason, although, I can't forecast the price of oil tomorrow, I'll forecast that you won't be able to manage that.
troll, please go away
I agree, I think there's something going on here. OPEC thinks there is something going on here.
click to enlarge
The chart above is from OPEC's feature article "Oil price developments challenge market expectations" on page 3 of their Monthly Oil Market Report - October 2007
http://www.opec.org/home/Monthly%20Oil%20Market%20Reports/2007/pdf/MR102... (49 pages)
Quotes below are from page 3 of OPEC's report
OPEC acknowledged strong prices, but it can't possibly be due to their inability to supply oil to meet demand, instead the high oil price is due to these factors
Next, OPEC says that it is able to supply oil to the market if required
I think OPEC is genuinely concerned about the oil price and that their inability to increase supply to meet demand could be exposed soon, especially if this winter is cold.
The last sentence is interesting "performance of non-OPEC supply". OPEC forecasts non-OPEC supply of oil (all liquids) to increase from 49.85 mbd in 3Q07 to 52.12 mbd in 4Q08. This is unlikely to happen and OPEC will say that our planned capacity was based on non-OPEC supply forecasts and the oil price went up because non-OPEC supply increases failed.
The other reason for the price increase in the chart above is that it more closely reflects the supply and demand pressures from crude oil and lease condensate production, not total liquids. OPEC, like the IEA, forecasts supply and demand using total liquids (includes NGPLs and ethanol). If the forecast supply and demand for crude oil and lease condensate (C&C) was used, the price increase, in the chart above, might well be justified by an increasing supply demand gap for C&C, even though there might be a much smaller supply demand gap for oil (total liquids).
Do you still stick by your Saudi Arabia 8.2mbpd forecast for this coming spring? Or did you want to take this as an opportunity to either remain silent or "adjust" that?
I'm pretty sure that the general consensus is that Saudi production is being constrained by Aramco in order to enhance the longer-term productivity. Likewise there's no reason not to believe that they can add 500 kbpd production this November and crank things up to around 9.1 mbpd for an extended period (my guesstimate). But do you really believe that they can push production up towards, say, 12 mbpd and hold that production level for perhaps half a year? Do you really believe that there is not a demand/supply imbalance that has a geological component?
So what's your point?
the point of a troll is to upset the community
Sort of looks suspiciously like Ace's predicted Q407 price shock, as predicted many moons ago...
Will the Saudis boost production substantially to bring prices down? That depends on two things :
* the Saudis deciding that $100 oil is not in their long-term interest
* their capacity to do so.
It seems they are determined to remain inscrutable. If they do not substantially increase exports, and announce that they are comfortable with $100 oil, we're no further forward with knowing their true capacities. But the circumstantial evidence that they are past peak would be stronger...
I still believe that the price declines right into November of both 2004 and 2006 had more to do with the interests of the House of Saud in keeping the GOP in power in DC than in market fundamentals. In line with that theory, I would expect Saudi production to being to ramp up again in march 2008, just like in March 2004 and march 2006, to bring down the price in WTI by November 2008.
There is nothing to demonstrate the truth of this theory, beyond the Saudi production statistics and the asynchronous movement of oil prices in the Spring and Fall shoulder seasons.
You really think the Saudis are Republicans? Do you think they have been well-served by the GWB administrations?
I rather think the umbilical cord between Riyad and Washington has been cut, and the house of Saud is looking after number one, from now on.
If they are interested in maximising exports to the USA (in the hypothesis that they have spare capacity), then they might back the candidate who is most hostile to America's energy independence, probably the Republican. On the other hand, if the continuing solvency of the USA as a client is their main concern, they may take the opposite course and favour a Democrat.
I would direct your first question to Bandar Bush. Perhaps it might be asked the other way round. I think at this point the Saudis have no choice but to be Republicans. Any American pullout from Iraq would leave the Shi'a in charge, which would mean Iran ascendant, which would trouble the preodminately Shi'a eastern provinces of KSA, which would threaten Ghawar, Abqaiq, et al., which would ... I think you get the idea by now.
For a short experiment, compare and contrast the conduct of the Bush administration with what a Gore administration would have done, not just in energy and environmental policy, but in digging into the backgrounds of 15 of the 19 highjackers on 9/11.
No, the umbilical cord between DC and KSA is tighter than ever.
Not even hardly. KSA remains the top customer of US defense weaponry, and just three weeks ago they announced a new $631 million purchase of US weapons. Sounds like the same old deadly embrace to me.
--C
I suspect that China's 11.5% annual growth together with its approach to being the third largest economy, surpassing Germany, explains the emergence of a demand curve that does not have the seasonal shape of prior years.
Chris
Let's read between the lines here:
1. Refiners can't PROCESS any more oil right now - so they won't buy any more. In the near term, DEMAND is fixed - not supply! So OPEC can't sell anymore; excess capacity is truly excess. If Saudi flooded the market, crude prices would drop but refineries would still be at capacity - so end prices to consumers wouldn't change. All that would change is profits would end up in the refiners' pockets, not the producers'.
What OPEC's statement means is that the markets should not be responding to fears of a crude oil interruption. IF the world's refiners need 80 bbd (or whatever), and Nigeria shuts down, OPEC (Saudi) will respond by moving us back to 80 bbd. That's stability of supply.
2. OPEC expects that the Majors and non-OPEC NOCs may continue to expand output, taking profits on the high prices. This expansion of non-OPEC production will be faster than any coming expansions of refinery capacity. This will therefore require OPEC to reduce its own production in order to avoid a glut and keep prices high - and OPEC recognizes this. That's stability of price.
Good luck if heliBen lowers rates again at the end of the month.
With crack spreads narrowing how long until oil companies start losing money even with record crude prices? Even a small drop in demand in the US could create a price war and start putting Big Oil in the red.
Remember, oil companies sell oil as well. The crack spreads are a drag on earnings, but with oil near $90 upstream will be pulling in big dollars. Oil companies aren't in danger of losing money any time soon. ConocoPhillips just announced earnings yesterday. Margins had dragged down earnings. They came in 5% below a year ago, but still managed $3.7 billion for the quarter.
Well said. But, at the same time (and I don't expect this to remain the case), if crack spreads were to remain at sub-$5 for let's say three years, how would this effect things?
Would the majors attempt to leave the refining business? I'm just throwing stuff out there. I guess what I'm trying to ask is - do low crack spreads really mean anything at all?
Could they actually go negative? I think not.
Or at least I used to. I read a book recently on derivatives trading that discussed the interest rate schemes in Japan. Apparently, there was a time where certain rates turned negative. Believe it or not. Based on deals cut with structures trading banks.
The lender was paying people to borrow their money.
Yes, this seems crazy when we talk about oil refining, but that is exactly what is happening in the oil shipping business right now. It has been going on for close to six months. And tanker stocks have still not turned south.
Most of the big publically traded players have been losing money shipping oil for the last quarter. Up to $15,000 per day per ship.
The situation is so bad, it can't even be covered up. And believe me, they've been trying.
Thank you for your frank recognition that you do not know what is going on, and thank you again for trying to enlighten us. Brainstorming is always worthwhile.
Echelon, I will be ignoring you from now on. Please go away.
Echelon appears to be OilCEO, who has been banned multiple times under multiple nicknames. This will be another one, I suppose.
The oil companies can't do that badly. The US imports gasoline from Europe, and until US gasoline imports fall below zero (forcing US refineries to pay the cost of exporting refined fuel) the essential price of US gas will always be at a premium.
Are there any estimates out there of the delta increase in finished oil and/or gas product usage (all the fire trucks, helicopters, air tanker support, etc.) in battling the Southern California wildfires? I am just wondering if there will be a meaningful reduction in currently published inventory estimates by this form of concentrated usage of product in a short span of 3-4 days.
CrucialTaunt
There will probably be a general decrease in usage. Many people are staying home from work, e.g. myself.
My office (in the edge of evacuation zone) was closed M,T,W, and will reopen tomorrow (Th).
All city schools, as well as major universities were shut for the whole week, presumably because of bad air quality.
Traffic has been quite light.
There will be a sharp spike in apparent gasoline use as everybody filled up their tanks, worried they'd have to go.
Are Governments still adding to their strategy reserves?
USA, not at the moment. China, Yes. Europe - don't know(maybe someone else does)
In general your $1000 would be safe. It should take until the new year for oil to crest $100 a barrel.
However, I recognise an increased pace of peak oil stories in the mainstream press. If we reach the critical turning point in coverage in the next two months then the price could bust through $100 in a self fulfilling prophesy - the switch from demand-led to supply-led pricing. Reporters love to break their story at a time when they can look prescient.
There is the feel of a shoe waiting to fall. If it drops before Christmas, your money is lost.
Oil has gone up almost 900% in 7 years. A 10% move in 2 months is certainly within the realm of mathematical possibilities. The january 100 calls (expiring in December) traded at $.46 today. If I still had a Bloomberg machine I could tell you what implied volatility that is - anyone?
I can get to a Bloomberg terminal, but don't know what to key in. I will try anyways, but let me know if you see this.
The points about a 900% price increase and touching $100/bbl are really just numbers games.
Using a three month running average would present a smoother and more realistic picture. It would also make the current price levels look higher relative to the 1970s since that peak was fairly sharp.
Do Bloomberg terminals get Imarex tanker futures? If so I'd be curious what the TD3 rate is for November or December.
The iVol on the call series would be ~28% on the CLF8s this morning. 50 day historical vol is running ~20%. Looks like RR is still safe.
Robert, I have a feeling the feds are going to cost you your $1000 dollars with their stupid actions to try and keep the debt bubble inflated. I am betting on another half point cut at the end of the month. We are likely to be at 100 oil and 900 gold by the end of the year, just because of the crash of the dollar.
Political View:
Oil industry is trying to hold the line on gas prices while energy legislation is debated in Congress. So refiners and marketers/retailers have lowered their profit margins on gas in hopes Congress does not penalize them with legislation that imposes windfall profit tax or restricts drilling or revamps previous federal lease agreements. Worst thing from the oil Co. persective is to have the public screaming about how the "oil companies are gouging the driving public", which is generally not true but the media portrays gas prices that way, especially at times of quarterly earnings reports
Once an energy bill is passed the consortium of oil producers and marketers/retailers (often the same bunch) will start pricing gas higher and it will come closer to parity with distilate fuels which is normally the case. Remember, a lot of gas is not sold on futures market but prices to marketers/retailers by the refiners/distributers (pipeline Co./refiner and the like).
A few years ago I worked for a small oil producer and also a small marketer/retailer (around 20 million gallons a month sold in a hand full of markets) and we talked about gas prices versus oil prices. This is just IMHO based on knowing the presidents of these two small players in the oil industry.
Mark in St Louis, USA
I have thought this might be the case, as the price of gasoline in my neck of the woods (East Tennessee) has been holding steady for at least the last month, even with the recent run up in oil prices.
In the past, any bump in the price of crude resulted in an immediate bump in price at the pump. Recently, however, the two prices seem to have been disconnected.
My layman's understanding of the market led me to suspect that the cost at the pump is being held down artificially somewhere, despite the rise in crude prices. I guess it is only good business to absorb a hit now, if it precludes a greater hit through legislation by those in power who happen to have little to no understanding of the underlying issues.