The Oil Drum

I haven't reported on inventories in about a month, because there really weren't any developments that merited a report. While crude, distillate, and propane inventory levels have been typical for this time of year, the gasoline situation is worth a note.

It sort of crept up on me, but last week as I reviewed This Week in Petroleum, I was struck by just how fast the U.S. has built gasoline inventories. Currently at 230 million barrels, I could not recall ever seeing gasoline inventories that high. So, I went back and looked, and the last time gasoline inventories stood at this level was in 1994. And in this week's report, we again had an increase in gasoline inventories:

Updated

Gasoline inventories did in fact edge upward, as gasoline imports were very strong. Had that not been the case, gasoline inventories would have definitely come down, as utilization continues to trend down. In fact, just glancing over the data, more gasoline may have been imported this January than in any other January before. As long as that continues, gasoline prices won't gain much traction. But European refiners have to take turnarounds as well, so gasoline imports typically fall off in February and March.

Updated:

Not too much to get excited about. Those reports of some refineries coming down early for turnarounds due to low margins look to be accurate, given the drop in refinery utilization. That would also explain the rise in crude inventories, but typically you start to see gasoline inventories coming down as the refineries come offline. Gasoline production did fall, as one would expect as turnaround season begins. However, gasoline inventories increased on the back of very strong gasoline import numbers.

With all of the traveling, and then trying to catch up after the holidays, I haven't had time to do a proper TWIP. Thanks to Nate for looking after it during my vacation. Anyway, mostly what we saw for the past month were crude draws, and gasoline inventories climbing back up and getting in pretty good shape prior to spring turnaround season. Part of the draw down in crude was tax-related. Many countries, including the U.S., tax crude inventories at year end. So, there is a bit of a balancing act as refiners try to draw down inventories while still maintaining enough on hand to weather any supply disruptions.

This week saw a large gain across the complex, and crude prices are falling as a result.

Updated: You would think if last week’s large inventory drop was due to fog-induced delays, all of that crude would show up this week. Not so, as another drop in crude inventories was recorded:

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) dropped by 0.7 million barrels compared to the previous week. At 304.5 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 increased by 1.6 million barrels last week, but are near the lower end of the average range. Both finished gasoline inventories and gasoline blending components inventories increased during this period. Distillate fuel inventories decreased by 0.8 million barrels, but are in the lower half of the average range for this time of year.

Update following the release:

Big surprises all around this week:

Summary of Weekly Petroleum Data for the Week Ending November 30, 2007

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) dropped by 8.0 million barrels compared to the previous week. At 305.2 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 increased by 4.0 million barrels last week, and are below the lower end of the average range. Both finished gasoline inventories and gasoline blending components inventories increased during this period. Distillate fuel inventories increased by 1.4 million barrels, but are in the middle of the average range for this time of year. propane/propylene inventories decreased by 0.5 million barrels last week. Total commercial petroleum inventories decreased by 3.8 million barrels last week, and are in the upper middle of the average range for this time of year.

2nd Update

Crude was down sharply following today's release. The AP explains:

NEW YORK (AP) — Oil's rise to $100 a barrel, which seemed a done deal as recently as two days ago, was dealt a severe blow Wednesday when the government reported an increase in supplies at the Nymex delivery terminal in Cushing, Okla., which is closely watched by traders as a benchmark of oil inventory tightness.

Overall crude supplies fell during the week ended Nov. 23 by 400,000 barrels, in line with the 500,000 barrel decrease analysts had expected. But that decline was overshadowed by a 600,000 barrel increase in inventories in Cushing, Okla. Cushing inventories are up 13.4 percent in two weeks.

Activity at the Cushing terminal is studied closely by oil traders because it is the physical delivery point for Nymex crude. Falling supplies there are seen as a symptom of a tight market, and those concerns ease when Cushing inventories rise.

At this point, I think the only chance oil has of reaching $100 this year is if OPEC comes out of the meeting next week and really spooks the market. Of course every time I say that, oil runs up $8. But I do expect it to drop into the $80's pretty soon.

Updated: Well, we got that big surprise, primarily because crude imports were sharply down from last week. Some excerpts:

U.S. crude oil refinery inputs averaged 14.9 million barrels per day during the week ending November 16, down 151,000 barrels per day from the previous week's average. Refineries operated at 87.0 percent of their operable capacity last week.

U.S. crude oil imports averaged over 9.8 million barrels per day last week, down 667,000 barrels per day from the previous week. U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) dropped by 1.1 million barrels compared to the previous week. At 313.6 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 increased by 0.2 million barrels last week, and are below the lower end of the average range. Distillate fuel inventories decreased by 2.4 million barrels, but are in the middle of the average range for this time of year. Total commercial petroleum inventories decreased by 6.9 million barrels last week, and are in the upper half of the average range for this time of year.

2nd Update

Now, 30 minutes after the release of the report, the market is starting to react, and oil prices are falling. Are traders really that slow to react? Or is that some kind of mirage because there is a delay in getting trades executed and reported? I get the impression sometimes that I could make a small fortune trading within the first half hour after the release of the inventory report. Seriously, someone who trades, please fill me in on this. With a big surprise like this, you can probably predict the direction prices are headed short-term with a high rate of success. But the reaction seems to develop very slowly. My question: If I placed a trade at 1 minute past the release of the report, when would I expect it to execute?

Updated following the release

Surprise, surprise. I don't know that anyone expected a big rise in crude stocks, but that's what we got:

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) rose by 2.8 million barrels compared to the previous week. At 314.7 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 increased by 0.7 million barrels last week, and are at the lower end of the average range.

Updated Following Report Release

About 10 seconds after the report was released, I scanned down and found what I was looking for: U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) fell by 0.8 million barrels compared to the previous week. I turned to the guy sitting next to me, as we had been talking about this today, and I said “$100 oil may have to wait for another day. The inventory draw was half what was expected.” We could still pop $100 today, but this inventory report doesn’t favor that. A higher expected draw was already factored in, so I don’t think this supports a quick move up from the current price level. But I wouldn't put $1,000 on it.

However, we are still close enough that it won’t take much volatility to push oil over $100. A single negative geopolitical event should do it. But in the absence of a brand new geopolitical or weather-related event, I will be very surprised if we don’t pull back a bit from $100 in the next couple of days.

So, why were oil inventories down less than expected? Because refinery utilization continues to languish. You can see that in the utilization numbers, and you can see it in the fact that gasoline had an unexpected draw. Imports were also up from the previous week, surprising given the situation in Mexico. The other big surprise? Gasoline demand is still almost 1% above last year’s level. (Don’t overlook the role of ethanol there. As ethanol is added to the fuel supply, volume demand will go up even if miles driven don’t. I have documented that here).