<More Thoughts on RelocalizationThe Oil DrumDrumBeat: January 31, 2008>

26 comments on This Week in Petroleum 1-30-08

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Euan Mearns on January 30, 2008 - 6:29pm Permalink | Subthread | Comments top


I grabbed this from a commercial report. Having mulled the meaning of inventories for months this was a great leap forward.

I know what I think I see here, interested to hear what others think.

Anyone got a link to the source data at EIA?

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westexas on January 30, 2008 - 7:33pm Permalink | Subthread | Parent | Comments top

My 2ยข worth, from September, 2007:

http://www.theoildrum.com/node/2975

First, the industry has clearly gone to a Just In Time inventory system. In the Eighties, the industry maintained much higher crude oil inventories, especially in terms of Days of Supply, which have fallen to about 21 Days of Supply currently, from about 29 Days of Supply in September, 1982.

Second, we need to evaluate crude oil inventories based on Days of Supply in excess of Minimum Operating Level (MOL). In the US, the MOL for crude oil is probably about 270 million barrels (mb). At about 322 mb, US crude oil inventories are probably best characterized by Hours of Supply in excess of MOL (about 80 hours). In my opinion, recent fluctuations in US crude oil inventories merely reflect minor changes in a thin margin of supply in excess of MOL.

Refiners are unlikely to let their inventories drop below certain critical levels, and given the expectation of declining world oil exports, refiners will have two choices: (1) Bid the price up enough to keep their inventories up and/or (2) Reduce their crude oil input, thus reducing product output.

My contention is that instead of focusing on crude oil inventories, we need to focus on world net exports, crude oil prices, refinery utilization, product prices and product inventories.

I expect to see crude oil exports trending down, crude oil prices trending up, refinery utilization trending down, product prices trending up, and product inventories trending down.

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Neven911 on January 31, 2008 - 12:13am Permalink | Subthread | Parent | Comments top

Westexas

given the expectation of declining world oil exports

I don't think this concerns them, they are simply trying to maximise profit whilst having their
margins squeezed, hence they are betting against crude prices prices dropping

Neven MacEwan B.E. E&E

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westexas on January 31, 2008 - 8:04am Permalink | Subthread | Parent | Comments top

I guess the key question is why are oil prices currently in a $90 to $100 range.

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GreyZone on January 30, 2008 - 7:34pm Permalink | Subthread | Parent | Comments top

What I think I am seeing here is crude inventories declining as prices rose from $10 to $30 per barrel, then slowly rising as price rose to $50 per barrel. After that we see strong inventory build even as prices climbed to nearly $80 per barrel, then declining inventories as prices rose towards $100 per barrel.

What does this suggest to me? My first impression says to me that the oil companies did not believe that $30 per barrel was justified and chose not to buy, but as prices failed to retreat they began to slowly accept this. Then as prices rose higher they realized that yes, oil supplies really were becoming seriously constrained (we can argue about peak later but definitely constrained). The oil refining companies seem to believe that oil was reasonably prices all the way to about $80 per barrel. As prices rose above that though, their buying falls back and indicates that they do not believe it is worth that much. Whether these beliefs are justified or not is a separate matter. I make this analysis because even though the graph does not show this, we know that the price increases have been very steady since 1998 in a generally rising trend.

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ChrisN on January 30, 2008 - 9:47pm Permalink | Subthread | Parent | Comments top

That's basically my interpretation as well: two periods where refiners withdrew from historically high prices, with a period in between where they accepted increasing prices and rolled with it...I assume because gasoline prices kept pace with oil, until around last May, when crude broke away from gasoline at around the $70 point and continued up, so refiners stopped purchasing so much. Margins are still at the low point (and, I'm betting, headed back up.) I'm too lazy to put the charts in here but here are the links:
Crude Oil Futures 2005-present
Gasoline Futures 2005-present

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WebHubbleTelescope on January 30, 2008 - 9:09pm Permalink | Subthread | Parent | Comments top

What I see from a left field perspective.

This has the looks of a Lissajous pattern where the inventory capacity oscillations have a long-term frequency that is 3X that of the price fluctuations, and the cycles are slightly out-of-phase. So if the price continues to drop, the curve will quasi-retrace its steps back. The amount of spread it exhibits is due the phase-shift hysteresis.

What does a 3X signify? Probably nothing but this is purely an electrical engineering view of plotting two variables that may or may not have anything to with each other.

Look at the one in the third row, second from left:

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PaulS on January 30, 2008 - 9:42pm Permalink | Subthread | Parent | Comments top

Nice try ;) but the rational-ratio Lissajous is a closed figure that retraces.

To complete the retrace, oil would have to get back down to around $15. Even without all that "liquidity" being injected by our freaked-out Fed...no.

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WebHubbleTelescope on January 30, 2008 - 10:24pm Permalink | Subthread | Parent | Comments top

I said that it retraces, but not exactly. Explain why as the price comes back down it is starting to retrace. I agree that it may never go back completely, but very similar to chaotic nonlinear systems a potential duty cycle limit may exist.

In any case, the pattern does give an indication of how you could get a closed-form and analytical expression for the empirical behavior that is seen.
Something like:
x=A*sin(t)+B
y=K*sin(3t+C)

the variable t is similar to time but it could creep along, speed up, or reverse itself as it creates the pattern.

Hey, I don't necessarily believe in this, just that it fits a pattern. At least as well as that stupid Logistic does for Hubbert curves :) :) :) You can probably guess by now that I was just waiting for that punchline.

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moster_magnus on January 31, 2008 - 3:44am Permalink | Subthread | Parent | Comments top

I think that we are seeing the oil companies expectations about future crude price and refining margins compared to current crude price. No economy in buying crude now and build stock if you believe that the price will go down in the near future. Also not a good idea to buy expensive crude now and sell cheap gasoline in the future.

Just my $0.02 ...

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gTrout on January 31, 2008 - 8:52am Permalink | Subthread | Parent | Comments top

price_vs_inventory

I annotated the graph with a few thoughts. The large cluster of data points is likely OPEC doing its part as a swing producer. Inventories drop and prices go up, a little more supply is released, inventories build and prices go down.

OPEC loses control of prices. What is odd is the build of inventory while prices are rising. If there was an expectation that prices would fall again then inventory should have remained low (the JIT line on the graph). But it didn't.

Instead refineries were willing to buy despite higher and higher prices. So I think that build was fear. Maybe that the US would attack Iran? Or they felt the world really had peaked?

Then as oil hits 80 they stopped being willing to pay and let inventory fall. So I think they are expecting that wave of oil in 2008. If it does not show up, expect another rush in price.

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Euan Mearns on January 31, 2008 - 1:49pm Permalink | Subthread | Parent | Comments top

I think the large cluster to the left is easiest to understand driven by price. When prices dropped, traders take the opportunity to build inventories and vice versa - when prices rise traders sell into the rise and inventories fall.

There seems to be a target inventory range (that hasn't changed much with demand over time). At some point a few years ago when inventories hit the 260 mmb low point we might normally have expected OPEC to open the spigot and to see prices fall back - but on this occasion that never happened and we have the price migration from 40 to 70 $. It is curious that with rising price, inventories built back towards 350 mmb - presumably this was related to the anticipation of future prices being higher and it therefore making sense to own more oil today - a shift to contango?

The final leg of rising price and falling inventory looks like traders selling into the strong price rally - presumably with the expectation that they can refill their tanks at lower price at some future date. The $100 question - what happens next? We've just seen an uptick in demand to 86 mmbpd with record high prices.

I suspect this chart is worth keeping an eye on. If prices fall then I think we can bet on inventories rising and we head back towards $70 and 360 mmb. If prices rise then we may see another $50 sprint.

The constellation of record demand, record price and low inventories seems fairly bullish to me.

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ChrisN on January 31, 2008 - 1:32pm Permalink | Subthread | Parent | Comments top

So Euan, are you going to tell us what eu see in that graph?

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