 | DrumBeat: October 31, 2007 | The Oil Drum | A Few Charts of the US Crude Oil Supply and Stocks Situation |  |
This Week in Petroleum 10-31-07
Posted by Robert Rapier on October 31, 2007 - 11:00am
Halloween Edition - Updated following the release of the report
Overall inventories decreased, and there was a fairly large crude draw, which is likely to push oil prices up from here. If the Fed cuts rates by 0.5%, then I would say we have a decent chance of $100 within the week. No rate cut, and prices probably fall back. (ED: See Khebab's post above for related charts.)
U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) fell by 3.9 million barrels compared to the previous week. At 312.7 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 1.3 million barrels last week, and are in the lower half of the average range. Both finished gasoline inventories and gasoline blending components rose last week. Distillate fuel inventories increased by 0.8 million barrels, and are at the upper limit of the average range for this time of year. Propane/propylene inventories increased 0.9 million barrels last week. Total commercial petroleum inventories decreased by 1.1 million barrels last week, but are in the upper half of the average range for this time of year.
Crude imports were up over last week (which isn’t saying much, as last week’s imports were very low). Gasoline imports were very healthy for this time of year, which is surprising to me because of the weak dollar, and the current level of crack spreads:
U.S. crude oil imports averaged nearly 9.4 million barrels per day last week, up 278,000 barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged nearly 9.7 million barrels per day, or 481,000 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 1,238,000 barrels per day. Distillate fuel imports averaged 325,000 barrels per day last week.
Refinery utilization slid again this week. Refineries should be coming out of turnarounds at this point, but low crack spreads are a disincentive for refiners to work around the clock and spend extra money to expedite returning to full capacity. Also, as the crack spreads decline, there are marginal barrels that you will simply be unwilling to purchase, as they will essentially take your marginal crack to zero. Refiners have models that predict things like this, and I have seen lots of cases in which barrels were available, but refiners chose to run at less than capacity rather than earn nothing on the additional barrels they would have to purchase to come up to full capacity. And I have first hand knowledge that this is indeed the case at some specific refineries.
U.S. crude oil refinery inputs averaged 14.9 million barrels per day during the week ending October 26, down 13,000 barrels per day from the previous week's average. Refineries operated at 86.2 percent of their operable capacity last week. Gasoline production fell compared to the previous week, averaging 8.9 million barrels per day. Distillate fuel production rose last week, averaging 4.1 million barrels per day.
Note also the seasonal shift toward distillates.
Finally, I continue to see conflicting reports on whether gasoline demand is up or down:
Total products supplied over the last four-week period has averaged 20.7 million barrels per day, down by 0.1 percent compared to the similar period last year. Over the last four weeks, motor gasoline demand has averaged nearly 9.3 million barrels per day, or 0.3 percent above the same period last year.
At this point, I think the Fed will make the final determination on whether we reach $100 within the next week.
Halloween Edition - to be updated following the release of the report
Yogi Berra once famously noted “It's tough to make predictions, especially about the future.”
I will add a corollary to that, albeit without Yogi’s succinctness: As a future event becomes more probable, the number of people who knew it all along will grow exponentially. I mean, let’s face it. Wasn’t if obvious that Boston would win the World Series? Likewise, wasn’t it obvious that crude prices would be knocking on the door of $100 as November approached?
I want to review, because I see a widespread affliction of amnesia following this recent 30% run-up. Flashback to August. Oil prices were poised to go on a run that would take them to over $90 in October. What were people saying then? It was in August that legendary oil man T. Boone Pickens told CNBC; "I think you're going to see $80 a barrel before I'm 80." His 80th birthday is in May 2008. CIBC World Markets said that crude prices could reach $80 a barrel this year and $100 by the end of 2008. Deutsche Bank raised its "long-term" oil price forecast to $60 a barrel. And the EIA wrote in their August Short Term Energy Outlook: “Crude oil prices, which have been rising over the last 2 months, are expected to reach a peak monthly average price in August before starting to ease slightly.”
That was conventional wisdom. Some were calling for lower oil prices, and those calling for higher oil prices certainly were not calling for $100 oil in 2007. That was what the talking heads and the analysts were saying in August. One notable exception was Goldman Sachs, who wrote that US crude price could top $90 a barrel in the fall and hit $95 by the end of the year if OPEC didn’t bump production. They nailed it. But their opinion was definitely not held by the majority as if it was obvious all along.
On the topic of Goldman Sachs, I have seen some suggest that they are trying to influence oil prices by telling clients to take profits. Of course one wonders if the same people were making those claims when oil was $70 and Goldman was calling for it to run to $90. I guess if you are long at $93, Goldman says take profits, and you start to lose money, it’s not that you misjudged. No, it’s market-manipulation. But that works both ways. And the U.S. Commodity Futures Trading Commission has noted that the long to short ratio has grown rapidly throughout this rise. That in and of itself will help fuel the climb. But this Goldman Sachs issue is a good example of why I don’t trade short-term. The fundamentals in the short-term can be wiped out by market sentiment. And things like their sell recommendation can swiftly change market sentiment.
Anticipating Today’s Inventory Report
As I wrote after the release of last week’s report, "this inventory report will provide a lot of fuel for the bulls for another week." A lot of fuel indeed, as oil ran up by about 10% in the past week, before correcting back yesterday. So, do we get tricks or treats today? Of course one man's trick is another man's treat. And this week’s inventory report will have lots of implications, as did last week’s.
If we see a big draw, I think we see another run at $100. A big build, and the profit-taking continues. However, complicating today’s report is the decision by the Fed whether to cut interest rates. If the Fed cuts rates by half a percent, and we see a big draw, I think we see $100 oil within a week. If the cut is a quarter point or no cut at all, I think we continue to see profit-taking unless there is a very big crude draw. No cut and a big build should cause prices to fall quickly. Of all the scenarios, I think the case for a sprint toward $100 is the weakest. My own thoughts are that we see a build* and a quarter point cut or less, and that oil prices slowly drift down in the short-term.
Personally, I wouldn’t cut rates at all after the battering the dollar took the last time rates were cut. But they didn’t ask my opinion. Nor, as far as I can tell, did the Fed read my blog to find out my opinion. But as I noted yesterday, someone at Goldman Sachs did. So I take full responsibility for manipulating the worldwide price of oil downward to avoid losing my $1,000 bet. :-)
*Note 1: If I was running a refinery, I would probably prefer to pull down inventories with crude at these prices. You have probably seen the comments from major oil company executives who don’t feel that the current price is sustainable short-term. If you believe a correction is coming, you may prefer to draw down inventories somewhat and take your chances. But as I have noted previously, that can be a Catch-22. Keep your inventories full at these prices, and you are supporting the current price levels. Pull them down in the current atmosphere, and you support the impression that supply is insufficient, which will favor higher prices.
Note 2: I won’t be responding to comments on this essay, as I have pumpkins to carve and kids to take Trick-or-Treating.
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First, I'm sure it's a typo, but you say in your first line that "overall inventories increased," when actually the report says "Total commercial petroleum
inventories decreased by 1.1 million barrels last week."
On the subject of Goldman Sachs, of course Goldman was talking its book when oil was $70 and they were calling for it to run to $90. Analysts always talk their book. No dispute there. But Goldman has played a documented role in price control in 2006, and the timing of their announcement yesterday, when inventories were likely to fall today and the Fed was likely to cut interest rates, was very peculiar. If they wanted to sell, a normal move would have been to fade the action when the price went up today.
And you are also incorrect that long speculative interest has grown rapidly throughout this rise. Net speculative longs were actually lower last week than they were in August, and they were roughly half what they were July 31. (Specifically, spec net longs went from 87,998 on October 16 to 60,026 on October 23, while commercial net shorts dropped from 77,841 on October 16 to 59,701 on October 23. On July 31, speculative net longs were 127,491.)
Speculators aren't the ones buying when the price is this high. They are looking for any trigger to sell (which is why the use of Goldman to jawbone the price was so effective--for 1 day). The reason the price went up so sharply recently is because commercial traders--insiders--reduced their net shorts.
Thanks Moe. I edited the first sentence...I'll let Robert fix it when he gets back from carving and spreading candy.
Trying to rush around, but I have made corrections. First was a typo, second was me going by memory from an OPIS report earlier in the week. I will have to see if I still have it. But I do have yesterday's, and it says:
As has been the case for the better part of 2007, money flow continues to drive this rally. According to the most recent Commitments of Traders report from the U.S. Commodity Futures Trading Commission, speculative long positions on the NYMEX outnumbered short positions by 60,026 contracts for the week of Oct. 26.
So, I have changed to reflect the long to short ratio. That's probably what they said earlier in the week as well, but I didn't have that handy and I am trying to rush today. If I have time later, I will update to reflect that OPIS report from earlier in the week, if it indicates anything different.
That's all from me.
Edit: OK, found the OPIS in question. This is truly all from me:
I've replied to this point on Khebab's thread of today. You have not taken into account the sell-off in longs caused by Goldman's reweighting of the GSCI in August 2006, which caused an artificial drop in longs.
And as I pointed out, August 2006 isn't between October 2006 and October 2007, which is the time frame that OPIS is talking about.
To Larry Kudlow, who told everyone to short CL yesterday...I would like to give an emphatic "bite me."
http://politics.reddit.com/info/5zj31/comments/
thank you for your support.
And, there is always behind the scenes political pressures. Here is pure speculation - someone high up in the Administration sits down with Goldman Sachs and says: You know oil prices are at record highs and it is going to hurt the economy. We do not believe that it is being caused by speculators (like GS and its clients) but the vast majority of the public does. You guys have made billions with your call for higher prices. Now we are being flooded by proposals from the democrats to increase the tax on dividends, increase the tax on capital gains, increase the tax on your hedge fund profits - essentially all of your clients. If the public believes that you are being enriched at their expense everytime they fill up their tanks, I do not see how we can hold these tax proposals off. So, you might want to consider cooling the $100 barrel oil rhetoric.
Robert one of the big signals I'm watching for is a decrease in gasoline imports. I think this is the first signal we will see that supplies are actually a problem for the US.
I'm at a complete loss as to why we can continue to get the gasoline imports we are getting. My best guess for the moment is that Diesel/Heating fuel manufacturing is causing a slight glut of gasoline even with the refineries reconfigured.
So the question would be assuming that diesel demand is high in Europe for example does it make sense for them to end up with excess gasoline even with the refineries optimized ?
I would think that even though output can be tuned its only within a certain range and because of the stronger diesel demand in Europe they may always produce excess gasoline for export so its a sort of might as well do it since they are configured to send gasoline to the US. Next the Euro price for oil is a lot lower than the dollar price this means it may actually be cheaper to buy oil in Euros refine it in Europe and ship it to the US than to buy and refine oil internally in the US ? So a strong Euro paradoxically results in cheap gasoline imports from Europe for the US. I think this monetary situation may be the real answer.
Its a complete mystery to me I expected and still expect a sharp increase in price of gasoline for export that has to be passed on regardless of what the internal US refining capacity and margins are.
We are getting shipments from china that their citizens cannot buy on account of prices too low... producers are shipping every barrel they can out of the country because prices are controlled, causing diesel and other rationing. Harmful to the economy, eventually prices will rise and internal demand along with it, at which point we will receive reduced product shipments.
I was aware of what seem to be serious problems in china that will eventually force them to expand imports and lower exports. Does anyone have any numbers on how much gasoline china exports ? It does not have to be to the US since the export market is fairly fungible.
The critical factor for the US is in my opinion when gasoline exports start to falter not when the US runs low on crude imports. I pretty much ignore US crude inventories I don't think they will matter for a long time. We will be able to import as much crude as we can refine well after gasoline imports drop substantially or at the minimum stop growing.
In the interim US crude oil imports play the role of setting the floor price for crude. Something has to break on the gasoline export/import side of the equation soon for the US as your China example indicates. They have to either start decreasing or increase substantially in cost soon.
1 Most speculators do not take delivery, and anyway if they were we would be seeing higher stocks. Speculators betting on higher price will buy a few months out, then close the position by selling as it rolls towards the front month. So, if speculators are controlling the market and pushing it higher, wouldn't futures be higher than spot? IMO highr spot is an indication of higher present demand, if not in the US (which anyway has falling stocks) then in the rest of the world. For example, tapis has been higher than nymex for most of the year as asia tries to attract cargoes.
2 There is growing awareness of PO, and also growing realization that supply has plateaued, if only temporarily, for a couple of years even as asian demand continues to surge. Meanwhile, we are in 4q with 1q coming, traditional high demand quarters. Is it not natural, and long predicted at tod, that more punters will take long positions in the futures? BUt the long positions are not, as noted above, sufficient to rise future prices... why is this?
3. REfineries are not processing as much crude as they could on account of low crack spreads. Another case of high world price and low US demand... why not accept that world demand happily soaks up every barrel that the us does not want, and that for cargoes to come here, we must compete with high asian prices? Tapis is higher than nymex, as it has been for most of the year, even though chinese demand is temporarily throttled by price controlled too low... this problem is hurting the chinese economy, so price will be allowed to rise, and demand along with it. So, the current situation has flat supply coupled with artifically restrained demand in the fastest growing economy on the planet. I see higher prices.
Exactly. Spec demand would show up in the longer dated contracts and the markets would be in contango as they were in 2006. Now, the price is clearly being driven higher by the spot market and the near month. This is all supply and demand for physical crude.
Unless you take delivery, you simply cannot affect the price, ultimately. You are just making a bet on the direction of future prices. For every long there is a short and they cancel each other out, it just ends up that one is right and the other wrong (or perhaps the other is hedging and is still very happy, thank you!)
The Saudis need SOMETHING to explain the high price other than that they are post-peak and cannot drive the price down by doing the normal thing which would be to pump more oil. Hence, all the nonsense about markets being well supplied, terror premiums, speculative demand and all the rest of it. The price is determined at the wellhead and at the pump. All the rest is propaganda.
It seems as though getting the truth through to the ordinary consumer will be next to impossible. Simple answer: production is in decline. And yet we get all this nonsense, day after day.
But what do we really expect the Saudis to do? Tell the truth? LOL!!!
I think its a little bit more complex thus my Whack-A-Mole theory. Enough real buyers are now forced to buy under duress that the speculators eventually have quite a few real buyers that will take delivery. Speculators are providing the peak prices but the floor price is being driven up strongly by desperate real buyers. Basically the real buyers are being forced to buy on the spot market at any cost as they wait till the last minute to purchase oil.
Its not quite as simple as you make it but if you consider the housing bubble for example speculators cannot drive up the price unless real demand is increasing.
At the beginning of this year, Robert, WestTexas and others were engaged in one of our ongoing debates about whether Saudi Arabia had peaked. I asked Robert and WT if they could supply a criteria which would definitely falsify their theories; in other words, was there a theoretical future set of events that would persuade them to believe they were wrong?
Robert was kind enough to give a very crisp response. He said if we saw inventories declining, prices increasing and no response from Saudi Arabia, that would falsify his theory. WT didn't give a direct response, but it was clear from his posts that if Saudi surpassed their old peak of 9.6 million barrels a day, he would be wrong. What actually transpired serves to illustrate how difficult it is to make good predictions about the future.
One thing Robert, WT, me, and probably most all of us thought back in January was that we would know the truth by the end of summer. We all thought summer driving season would push up demand and put the Saudis to the test.
What really happened was that inventories did start to decline in the spring, but most all of the decline was reflected in gasoline rather than crude. Thus, OPEC could plausibly point to adequate supply, but refining problems. By the time it became apparent that crude supplies might also be a problem, we had reached the end of summer and OPEC then announced a half million barrel increase to take effect in November.
The Saudi reaction has turned out to be too little and too late to stop the price run-up. It puts Robert's bet on $100 oil in jeopardy even though he hasn't yet been proven wrong on Saudi peaking. Furthermore, we are still looking to the future to see what they really produce as opposed to what they say, and neither Robert nor WT has yet had his theory definitively falsified.
amen and amen. well said.
You are correct regarding my position. Many regions, e.g., Texas & the Lower 48, have seen post-peak periods of flat production or even year over year increases in production, but what refutes a peak is a new peak. We would have to see an average annual crude oil production rate of 9.6 mbpd (C+C) or more for a given calendar year to refute the presumed 2005 peak.
As I noted in the comments section to Stuart's 8% decline rate post on Saudi Arabia, I anticipate that Saudi Arabia will at some point show a rebound in production following the initial decline.
Regarding the question of who predicted $100 oil by end of year: one need look no further than your betting partner, Robert. I don't happen to know who that was, though.
You know the year on year numbers are far more interesting than the Upper End of Range BS they keep feeding.
My math shows total commercial inventories down 56 million barrels YOY.
A million+ a week.
That range is bogus anyway. Its the 5 year average plus 2 std deviations plus "seasonal adjustments".
Whatever that means.
Kehbab's inventory graph in the other thread is far more revealing.
That range is bogus anyway. Its the 5 year average plus 2 std deviations plus "seasonal adjustments".
Whatever that means.
Could you elaborate on why an average with standard deviation is bogus? I mean, that methodology has been employed by the EIA and the IEA as long as I can remember. Did it just now become bogus? Someone should tell them.
What I find interesting is that when those inventories are climbing, we don't hear anything about it. Only when they fall. So, even if they just go up and down, all we ever hear are "inventories are falling!" I noted this last year, when they fell (the sky is falling!), and then they came back up (silence).
You know the year on year numbers are far more interesting than the Upper End of Range BS they keep feeding.
No, it isn't. Why don't you take a look, and get back to me with exactly when inventories came out of the range to the high side, and stayed above the range? See if you can identify a cause for that. And regarding that, I have said for a long time that I expected inventories to eventually come back down within the range as oil companies started to develop amnesia regarding why they started carrying them so high. But we haven't put in a bunch of new tanks in the past 3 years. So, refiners have been carrying high inventories. At $90 a barrel, is it any wonder that they might decide to pull them down? If you ran an oil company, and thought that this was a speculative bubble, what would you do? I know what you do if you think oil has peaked, but believe me they don't.
Some of you guys literally amaze me. You get a cause in your head, and that can be the only cause. I talk to people in the business about this stuff every single day. I got first hand information from someone yesterday that the current price is exactly why they are choosing to pull inventories down. Their tanks are full of $80 oil, and they want to try to wait it out and refill them with $80 oil. They are knowingly taking a risk, based on what their internal forecasters are telling them. If prices don't come down, they are stuck refilling them with $100 oil. But by not refilling them, they continue to add to the perception that supplies are insufficient.
My math shows total commercial inventories down 56 million barrels YOY.
Let's review the numbers. Crude is down 22 million barrels, to 313 million barrels. Of course a year ago crude was in record high territory. Did you expect it to stay there? I didn't, and have said as much many times. You have a lot of money tied up in that inventory, and at $90 you will seriously weigh those inventory decisions. Gasoline inventories are down 10 million barrels, at 195 million barrels. They are legitimately very low, and I have been harping on gasoline inventories since spring. Distillate inventories are down 6 million barrels, and are at the top of normal for this time of year.
Why is it that people think the draw down is the anomaly? Look at the run-up in crude inventories to all time record territory earlier in the year. That jumps out immediately as the anomaly - not the draw down back into normal territory.
It strikes me as anomalous that the price would go so high when refineries are NOT buying it. The doesn't jive with your assertion that supplies are adequate, because it implies that were the refineries to buy enough oil to keep inventory levels stable, it would push the price even higher. And higher prices are what you see when demand begins to outstrip supply.
Or is someone out there producing oil and not finding a buyer?
*Some* refiners are holding back *some* of their purchases.
Maybe I'm wrong, (Robert? WT? anyone?), but I would assume that decisions to tap inventories are not all-or-nothing, but rather a question of degree. Refiners will continually take delivery of some (roughly fixed) volume crude (50% of total throughput? 80%?) because the system can't handle sudden large shifts in demand - gotta keep the pipelines flowing and the ships and money moving. The balance will be sourced on shorter notice from the markets or the refiners' stockpiles.
It is that balance that refiners use to respond to market conditions. So most refiners are scaling back their marginal production, to cut costs, and using inventory oil for that production, because they think the price will come down.
The real question is, why are margins so thin?
Why don't refiners just refine less? Due to fixed costs, if they refined less, they'd actually cut their margins even more. Okay, why don't they refine more? Because increasing utilization rates increases their relative costs (overtime, maintenance, etc.). Refiners are just sitting at their Goldilocks point in the curve: operating at absolute minimum profitability. Why don't they raise prices? Could be competition from a European gasoline glut (or ethanol), or weaker consumer demand.
Very interesting problem, all around...
You show a very good grasp of the situation. Refiners would love to raise prices and increase margins, but demand is softening. That puts them in a tight spot.
Could someone explain to me how to interpret the refinery capacity utilization numbers? Does the number reflect past utilization (like last week) a rolling number (like most recent 4 weeks), or some outlook of current or forecasted number (like forthcoming week's utilization)?
Also, if increases in inventory are bullish and decreases bearish, what is the general effect of an increase in capacity utilization? Or does it depend on the corresponding inventory move?
Anyway, your insights would be appreciated.
Lou
I meant to write that inventory increases are bearish and decreases bullish. Sorry for the confusion.
Lou
Both figures are in the data, generally it should be for the week ending the report date unless it's stated its the four week average.
For todays report (for week ending Oct 26) refinery utilization is given as both:
86.2% last week.
87.1% average of last four weeks.
As for what it means if it goes up or down, I think there's a few lengthy items around here right now debating what it actually means - my simpleton view would be that it means less crude being used, less product being produced, which should be bearish for crude and bullish for product.
HOWEVER - the one thing I know with certainty after putting my money on the line in this game, is that whatever I think should be the case for the market in the short term, I'm wrong.
So all my bets are long term, and if Robert says: it's mainly just maintenance, no trends to spot yet folks - then I'll just relax and wait a bit and see what's next...
--
Jaymax (cornucomer-doomopian)
Refinery utilization is the "past week" (or 4-week) value.
It's the value from the gross crude inputs divided by the "operable capacity."
As for it's effect, it depends upon the corresponding inventory move (and the underpinning demand) for the production monitored.
Regarding RR's comments about the profit margins in refining varying with crude prices - I can see why it would not be economic to buy certain grades of oil if they are uneconomic to refine, but what determines the profit margin on oil refining?
Surely if Bob is a petrol retailer, Bob buys fuel at whatever price the refiner sells it at? Its not a competitive market since he has the logistics of having it delivered, and refiners cannot compete much since production is constrained by capacity. Presumably the refiner is contracted to deliver at price [x] for 1 month? 2 months? But a long term fixed price would be daft. We seem to be describing the refiner as the helpless sap with no control [maybe those chinese refiners where there is fixed retail prices]. If I owned 'pondlife refineries inc' then the forecourts would buy my products at crude price x [y] or go elsewhere. Why is this not the case?
Hi Robert
I would be grateful if you or anybody could answer a couple of my questions.
a) What is the typical (or average) amount of crude that a refiner stores? 1 day, 1 week or 1 month?
b) Whenever a refiner buys crude, does he contract for immediately delivery, or is it 1 week later or even 1 month later?
c) How is this price determined? Based on contract date or delivery date or ?
Many Thanks
Different refiners probably do it in many different ways, but here is my experience.
1. One to two weeks is probably typical, but the last place I was at it was 3 days. And that caused all kinds of trouble, because if there was a delay in the pipeline, you could be down very quickly. I used to hear "we need more tankage" on a daily basis. Low volumes cause the potential for trouble. Which is why - following the lessons from Katrina - refiners suddenly started carrying such high inventories. Many ran out of product. But now that hurricane season is passing and crude is at $90, it is not entirely surprising that refiners would draw down crude.
2. The refiner runs the LP (I intend to do an essay on this soon) and compares the available crudes. This determines which crudes will be purchased. You first go after those with the highest projected margins, and you work your way down the list until either the refinery is projected to be at capacity, or the margin on the next barrel drops to an unacceptable profit level (somewhere between $0 and $5 per barrel). Complicating that is that you have contracted volumes to meet, so you may have to run those marginal barrels at a low return.
Once the decisions are made on which crudes to buy, the crude trader is contacted. The desired crudes and volumes are secured, for delivery within 2 weeks to a month. Of course if it is coming from halfway around the world, that doesn't apply. Ours was coming from Canada.
3. The prices are set by a formula (such as 95% of spot). I believe - but I am not 100% certain - that the price is the price on the day that the trade is made and not when delivery is made. I don't think anyone would contract a shipment from the Middle East, only to have the price rise by 10% while in transit and be expected to pay that.
Thanks!