This Week in Petroleum 1-30-08


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.

Here is the summary:

Summary of Weekly Petroleum Data for the Week Ending January 25, 2008

U.S. crude oil refinery inputs averaged 14.6 million barrels per day during the week ending January 25,down 302,000 barrels per day from the previous week's average. Refineries operated at 85.0 percent of their operable capacity last week. Gasoline production edged slightly lower compared to the previous week, averaging about 8.9 million barrels per day. Distillate fuel production fell last week, averaging nearly 3.9 million barrels per day.

U.S. crude oil imports averaged about 10.1 million barrels per day last week, down 100,000 barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged 10.1 million barrels per day, unchanged from the same four-week period last year. Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged nearly 1.2 million barrels per day. Distillate fuel imports averaged 277,000 barrels per day last week.

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) rose by 3.6 million barrels compared to the previous week. At 293.0 million barrels, U.S. crude oil inventories are in the lower half of the average range for this time of year. Total motor gasoline inventories increased by 3.6 million barrels last week, and are above the upper limit of the average range. Both finished gasoline inventories and gasoline blending components inventories increased last week. Distillate fuel inventories declined by 1.5 million barrels, and are in the lower half of the average range for this time of year. Propane/propylene inventories decreased by 3.0 million barrels last week. Total commercial petroleum inventories decreased by 1.0 million barrels last week, and are in the middle of the average range for this time of year.

Pre-Release Commentary

OPEC is meeting later this week, but the comments coming from various members indicate that they are unlikely to boost production. I think this continues the theme that we saw most of last year, where truly low inventories were mostly prevented by higher prices, and then OPEC used the inventory situation to suggest that markets are adequately supplied - which completely ignores the price signal. But certain OPEC members have now grown dependent upon the revenues provided by $100 oil. As long as they maintain solidarity, it is unlikely they will allow the price to drop too much - recession or now.

Here is what analysts are forecasting for this week:

A Reuters poll of analysts ahead of weekly U.S. government inventory data forecast a 2.1-million-barrel rise in crude stocks, a 1.9-million-barrel draw in distillate inventories and a 2-million-barrel build in gasoline stockpiles.

If spring turnarounds are indeed starting early, then the only way gasoline stockpiles will build is if gasoline imports remain strong (which they were last week). If that is the case, then $4 gasoline will remain elusive, as imports will keep pressure off of inventories.

That same story also had a note about speculative positions:

U.S. regulator data on Friday showed NYMEX crude oil speculators slashed their bets on rising prices in the week to Jan. 22 to their lowest since mid-December, cutting net long positions by nearly 50,000 lots to 37,000. "It shows the large speculative funds reducing aggressively their net length exposure on futures through a combination of long liquidation and fresh short positions," said Olivier Jakob at Petromatrix.

There is concern about a recession dropping prices, but I think the counter to that is that OPEC would probably be willing to cut if prices dropped too much. I will update following the release of the report.

Personal Note

On a personal note, I have decided to leave the oil industry effective March 1 to become the Engineering Director for Accsys Technologies PLC, based in London. I provided a few details in a post yesterday. At some point I will write up something on the technology, as it impacts directly on energy and sustainability - two issues that I will continue to write about.

Although net crude long positions decreased, speculative (non-commercial) net gasoline longs slightly increased and outnumber shorts by about 3 to 1.

Gasoline stocks are almost rebuilt and prices have been trending down. Delayed price elasticity kicking in!

Still too many heavy, high fuel consumption vehicles on the road, including many new ones.

Great news on the job change! Best of luck in your transition.

All the best to you in your new job, Robert. And your voice will still be sought out on energy issues. You have established a positive track record in that regard.

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?

My 2¢ worth, from September, 2007:

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.


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

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

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.

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

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:

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

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:

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.

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 ...


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.

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.

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

This thread has a lot of extremely involved exhanges regarding the various forces, geologic and economic, involved in production of all forms of oil. Yes, the economists were right from the standpoint that higher prices would generate more production of oil sands, ethanol, etc., however the bottom line is the geologists where right, that the cheap stuff has already been used, and now what we have is the more expensive forms of oil on the other side of peak.

As post peak crude extraction descends and increasingly greater expense occurs from oil production from oil sands, shale, ethanol, etc., prices at the pump will continue to rise, food prices will skyrocket, a permanent recession will entail, and at some threshold price for oil in whatever form, the world economy will descend into a depression. The only way to avoid that dynamic is by way of developing a replacement oil that is replenishable, like algae ethanol or ecoli synthesized fuel. We can either have a revolution of mass produced microbe synthesized oil production on a scale equal to crude replacement, or we will suffer the consequences of failing to have a plan B.

The only way to avoid that dynamic is by way of developing a replacement oil that is replenishable, like algae ethanol or ecoli synthesized fuel.

This is neither practical nor desirable.  The only uses which require hydrocarbons as such are those using them as lubricants or for chemical feedstock.  Almost everything else can accept substitutes to a greater or lesser degree, and it is almost certainly cheaper to e.g. electrify our transport system than to embark on a massive program to produce artificial oil to feed our existing noisy, inefficient, polluting engines.

best wishes at new gig---hope you keep doing TWIP ---PK

Actually, I have been thinking about taking a break with it for a while. The last few have been pretty routine, and by the time this gets published, the numbers have already been hashed over in Drumbeat. So I am thinking about doing it ad hoc in the future.

I do plan to get back to doing some meatier essays pretty quickly. My family flies back to the U.S. this weekend, which will leave me with some time to fill for a while. Last year I filled it by writing quite a bit.

Bonne chance!

What specific gravity do Accsys obtain with their process? I play Irish bagpipes which are usually made from ebony (Diospyros ebenum), which has been heavily harvested over the centuries for piano keys and the like. Worked for a while for a rare woods importer and we cut up a huge heap of striped ebony for use in, what else, duck calls.

The other important black wood for woodwinds is African Blackwood or Mpingo (Dalbergia melanoxylon), which they've tried to plant in recent decades. Blackwood is a bit harsh toned for Irish pipes, though, too dense, too many oils. Ebony's SG is ca. 1.12, AB is something like 1.25 IIRC. Would be nice to know if we'll be able to approximate these timbers someday.

PS You hear Irish pipes in the documentary "Crude," when they introduce Colin Campbell.

I don't know if specific gravity has been published, but there are published papers quantifying it. Roger Rowell, a University of Wisconsin professor (employed as a consultant by the company) has written several technical papers that detail the property changes that take place when wood is acetylated.

You can also find some specific information in the FAQ at the Titan Wood site (an Accsys subsidiary):

Someone was asking me a question this morning about the wood, and I thought of your query after I ran across this blurb about using it in harmonicas:

Accoya™ wood’s superior dimensional stability opens up a wide variety of applications for this ‘new wood species’. Successful trials have, for instance, been carried out in Europe for the production of the wooden combs used in harmonicas. Here, Accoya™ wood is particularly valued as it will not react adversely to humidity caused by human breath.

The one thing I'd wonder about is how long it would take some bug to evolve the capability to de-acetylate sugars.  There's a bug which evolved an enzyme to digest polyethylene, so it's bound to happen.