This Week in Petroleum 2-27-08

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:

Summary of Weekly Petroleum Data for the Week Ending February 22, 2008

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) rose by 3.2 million barrels compared to the previous week. At 308.5 million barrels, U.S. crude oil inventories are in the middle of the average range for this time of year. Total motor gasoline inventories increased by 2.3 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 decreased by 2.5 million barrels, and are in the lower half of the average range for this time of year. Propane/propylene inventories decreased by 2.4 million barrels last week.

Gasoline inventories from a year ago were fairly high at 222 million barrels, but then in mid-February we started a steep slide (accompanied by a steep increase in gasoline prices) to record low territory. We bottomed out in May - just before summer driving season - at 193 million barrels. We then struggled to build inventories back, and spent from May until December hovering along near the bottom of range for gasoline inventories.

But starting in December, we had a very steep build that has now put us well above normal. Why, and what is the significance?

I think the "why" is two-fold. First, gasoline (and oil) prices this winter were much higher than they were a year ago. There were conflicting reports about whether gasoline demand had fallen, and by how much, but EIA data do suggest that demand during late 2007 fell marginally year over year. It is encouraging to me that (some) people are willing to change (some) behaviors as prices soar.

Of more significance, though, is the difference in imports from a year ago. In late 2006, gasoline prices really crashed, and this had an impact on imports; they fell from previous year levels. In late 2007, gasoline prices were about $0.80/gallon higher than the prior year levels, and this attracted more imports. The sharpest contrast can be seen by comparing December 2006 to December 2007. In 2006, gasoline imports were never above 1 million bpd, and in 2 of 4 weeks they were below 900,000 bpd. In 2007, imports were only just shy of 1 million bpd once (0.985 million bpd) and then in 2 weeks out of 4 they were above 1.1 million bpd. That is the primary reason inventories bounced back so sharply starting in December of 2007.

The import numbers for this week continue to be strong, both for gasoline and for crude oil:

U.S. crude oil imports averaged nearly 10.0 million barrels per day last week, down 144,000 barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged about 10.1 million barrels per day, 743,000 barrels per day above the same four-week period last year. Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged nearly 1.4 million barrels per day.

We could still potentially see $4 gasoline by summer, but it is looking increasingly less likely that inventories will drive the price as they did last year. Inventories should start to come down as turnaround season gets into full gear, but we are starting this year in a more comfortable place than last year. To hit $4 by summer, oil prices will need to continue the current run - maybe to the $120/bbl range - and/or gasoline inventories need to start coming down quickly. If oil holds at around $100, we are going to have to see a pretty steep draw to get to $4 before summer.

Very insightful explanation, sir. I've been watching the numbers on inventories, and very much all indications point to the fact that we are indeed going to see $4/gallon gas.

Demand grew in 2007, albeit not as sharp as prior years, and I've heard speculation by my contacts in the industry that 2008 will see flattened demand. Are we driving less, or driving more fuel efficient cars?

Since we are hitting that refinery turnaround season, one indication of a sharp rise is the impending expiration of RBOB contracts on the NYMEX. As of yesterday (26 Feb), March deliveries settled at $2.5503 with April at $2.7133. Nearly a 15-cent difference on the wholesale cost, which generally equals a quarter more at the pump.

My next question to you, Mr. Rapier, is how did you get those EIA stats before they were released?

they are released each wednesday at 10:30 am EST. The actual "TWIP" report is out at 2:30 pm on wednesdays. But fast fingered Robert had his report out 8 minutes after the numbers hit. Doesn't seem to be much reaction in markets as of yet - oil down about $.50 after hitting $102 last night

The actual "TWIP" report is out at 2:30 pm on wednesdays. But fast fingered Robert had his report out 8 minutes after the numbers hit.

Yeah, sorry it took so long. I had to mow the lawn first. :-)

Since we are on inventory talk, the SPR is building, too. Feds want to reach 1.5b bbls by 2029.

Anyone have some thoughts on that?

Thats easy next question :)

I'd say that although I can't see how it will help I think that they realize that the world is becoming increasingly unstable and that we are not going to escape hurricanes in the Gulf forever.

I'd not read to much into it except that it looks like they are not anticipating a steep drop in prices anytime soon. We expanded the facilities a while back and I'm sure they needed to be expanded to ensure supply during disruptions.

If I had to guess top valid concerns.

1.) Incident in ME between US and Iran. Is tense one wrong move and problems.
2.) Trouble in Mexico damaging oil infrastructure.
3.) Venezuela attempting a embargo.
4.) Hurricanes.
5.) It has new empty capacity that needs to be filled.

Knowing the government five is probably tops.

I think they'll keep building the reserve until there's no oil available for a build. For my part, I think it's good we have a solid reserve. It will buy us time when/if a real supply crisis occurs.

Just an interesting thing to point out -- OPEC is now positioning against reserves/stocks builds. I think they'd like to sell the oil later and at a higher price. And has anyone noticed that OPEC has had a really tight finger on the tap lately? They seem to be trying to match output with worldwide demand almost exactly. It's a concern. Is it possible spare capacity figures are a bit exaggerated? Or, as some say, is OPEC simply colluding to support higher prices -- all economies be damned?

I think that OPEC is working under a new set of rules. Since we have not had a real crisis yet its hard to determine what the new paradigm is. So we are in a sort of in between state that probably won't resolve till later this summer. My best guess is OPEC wants to see the price level that causes worldwide demand to start dropping. Too many OPEC producers are in decline or maxed out and if anything they know the situation better than we do. Shooting for a price point that leads to slowly dropping demand overtime makes a lot of sense. This implies that they are also betting that None OPEC production is in overall decline or cannot grow significantly.

So given that we could easily not see the true capabilities of OPEC for a few more years.
I don't think they are worried about the world turning away from oil anytime soon they can do the math on that one as well as we can.

This implies that they are also betting that Non OPEC production is in overall decline or cannot grow significantly.

Or that those that are able to expand production would be interested in joining OPEC. For example Angola joined recently. After the latest discovery the possibility of Brazil joining was mentioned.

" 1.) Incident in ME between US and Iran. Is tense one wrong move and problems."
This one is totally our doing. Iran has no desire for an incident, but we sure seem to.

" 3.) Venezuela attempting a embargo."
Again, if they embargo us, it'll undoubtedly be because we asked for it again and again.

" 5.) It has new empty capacity that needs to be filled.
Knowing the government five is probably tops."
The SPR is a small drain on supplies and, in my opinion, it's well worth filling even with $100 oil. It's there to guard against supply disruptions, not to turn a profit.

This one is totally our doing. Iran has no desire for an incident, but we sure seem to.

That must be why Iran was getting confrontational with 3 US warships (cough).

Again, if they embargo us, it'll undoubtedly be because we asked for it again and again.

Yeah, asking Venezuela to either stick to the terms of contracts signed by Chavez or pay market value for assets they're taking is the behavior of capitalist running dogs.

There is of course the Days of Supply issue.

In February, 1994 we had about 32 Days of Supply on hand, versus about 26 today. Assuming a MOL of about 170 mb for gasoline, it looks like we currently have about one week of gasoline supply in excess of MOL.

My premise is that five year inventory numbers (especially for crude) just reflect minor variations in a thin margin of supply in excess of MOL as the industry has gone to more of a just in time inventory system.

For example, in 1994 if we assume that the gasoline MOL then was 140 mb or so, the industry had about 12 days of supply in excess of MOL, versus about 7 days today.

However, If we are, as I believe, looking at a bidding war for declining net oil exports, clearly demand must fall, and I have cited the example of a geometric progression in gasoline prices: $2, $4, $8, $16 . . .

At each doubling, what would happen to demand, i.e., the volume that buyers can and will pay?

As refiners in importing countries have to balance more expensive crude against the volume of product that consumers in their market can and will buy, wouldn't the refinery utilization rate in importing countries decline?

Note that the average utilization rate in February, 2008 was 84.4% versus 86.2% in February, 2007. As Robert noted, this was partly due to them going into early turn around work, but if they can't make an adequate profit refining expensive crude, they will curtail their refinery runs until: (1) Crude prices drop and/or (2) Product prices increase.

So it appears prices will go down or level off as long as countries can still pump oil and give it too us?

Why haven't gas shortages in other countries (like China) had an appreciable difference on our price and supply? As much as this website talks about Peak oil - depending on how much of our crude is "locked-in" we could be one of the later countries (after many others) already have severe shortages. I mean - that seems to be the case now, other countries with shortages (albeit heavy price controls which don't help) and we're building inventory?

What am I missing? How are we able to build inventory when other countries have shortages?

I think that the supply problems in China were primarily related to price controls. In regard to shortages elsewhere, I think that it is simply demand destruction progressively moving up the food chain.

Let's assume a geometric progression in crude: $50, $100, $200, $400 . .

This results in a geometric progression in gasoline: $2, $4, $8, $16. . .

As (IMO), net oil exports decline, the refiners in importing countries are caught between these two geometric progressions. They have to balance higher crude oil prices against the declining number of consumers who can and will pay the higher product prices.

With continuing apologies to several literary figures:

"Ask not for whom forced conservation comes, it comes for thee."

Another way to look at it is to consider gamblers the first one off the table is the one that runs out of money.

We're building inventory for a number of reasons:

1. We are paying, in many cases, the highest price for the highest volume. Since we buy the most oil, and we're willing to spend an arm and a leg for it we can still snatch up sellers at the expense of most other countries.

2. We have energy security arrangements with countries like Canada, Mexico, Iraq, and even Saudi Arabia which obligate them to ship to us.

3. Iraq. We have hegemony over Iraqi oil supply.

4. Shipping lanes. We control and secure many of the world's oil shipping lanes. It's not that we take the oil so much as we ensure safe passage to and from US ports. It makes it easy for many countries to ship here.

5. Heavy Oil. The US still has the largest heavy oil refining capacity in the world. So much of it can come to us where it still has difficulty finding other markets.

6. Military presence in the world's oil producing regions. We have limited but substantial influence over the world's oil supplies due to our military presence in many of the world's largest oil producing regions. According to the Carter doctrine, the US would go to war to secure oil supplies in a pinch. Many countries have decided it is better to make a fortune on the US demand for oil than to invoke the US's anger and risk becoming the next Iraq. On the other hand, countries like Iran and Venezuela have made policy out of visibly opposing US oil hegemony. On the one hand, Iran suffers from sanctions. On the other, Venezuela enjoys status as a top exporter to the US.

7. The tough Irony is that all major oil exporting countries are to some degree dependent upon US demand. Even with a rising China, it is unclear if Chinese demand at the expense of US demand could result in the same beneficial relationships many exporters have seen. The status quo is also very powerful in this regard.

8. Most oil still trades in US dollars. This results in the US still having a lever to influence the flow of world oil supplies. Despite the moves by many countries, shifting reserve currency takes time and money.

9. Food exports. The US exports food to most oil producing countries who must import food. Food is becoming a more potent lever for trade in a food constricted world. Food for oil is not explicit but becomes implicit if you look at trade relationships like Angola and Iraq.

In all, the US is still a very powerful economic player on the world scene and has many options to ensure its energy security.


Previously, I had said that the oil companies (generally all of them) appeared to be comfortable with prices in the $80-$90 range. This was based on my observing that crude inventories would increase during periods when prices were in that range. Further, the oil companies previously were not comfortable above $90, attributing those prices to "speculation" and not building inventories at that higher price range.

Now, however, we see inventories building in the $90+ range. Does it appear to you that the industry is reaching a consensus that $90 oil is now "normal"? And how much of that is demand driven versus the fall in the dollar? The dollar fell to $1.50 per Euro yesterday, reaching a record low which shows that the global value of the dollar continues to decline. As best I can tell we've moved from $1.39/Euro a year ago to $1.50/Euro now - close to a 10% drop in value of the dollar. At the same time, we've seen oil company willingness to build inventories rise by roughly 10%, from the $80-$90 range to the $90-$100 range.

What this says to me is that the oil companies don't necessarily yet believe we are at peak but they can see that supply is tight, demand globally continues to rise, and total liquids production continues to lag behind demand (with crude production being flat or slightly falling for 3+ years now). This appears to fit both peak and peak lite scenarios so there's still no obvious indicator one way or another about peak yet.

This brings me to my final question to you - you have consistently expected at least one additional break out in production. It appears that we may be seeing that breakout beginning to occur but where do you expect (a) total liquids to peak and (b) crude oil to peak? I separate those two issues because it is becoming increasingly clear that, at least for a little while, we could have increases in total liquids with flat or even declining crude oil production.

Thanks in advance for any insights.

Does it appear to you that the industry is reaching a consensus that $90 oil is now "normal"?

Yes, slowly but surely they are coming around to the realization that things are different this time around. There won't be a return to $50 oil. I am having fewer of those arguments these days. I did have this very discussion today with an Iranian engineer in my team. He said he couldn't understand what's going on with oil prices. I showed him my graph where the slope of oil production is up, but the slope for demand is even steeper and eventually intersects with the production curve. That is enough to explain what's happening with oil prices. But I told him if we are at a peak, he is soon going to look back on the time that oil was only $100 a barrel.

where do you expect (a) total liquids to peak and (b) crude oil to peak? I separate those two issues because it is becoming increasingly clear that, at least for a little while, we could have increases in total liquids with flat or even declining crude oil production.

And that's exactly what we have been seeing lately. Since total liquids production was at 85 million bpd, I have been predicting that we could add another 5 million bpd. The early indications are that we have closed about half that gap. But I am sticking with my initial 90 million bpd. For just crude, I thought we could add another 3 million bpd. So far, we haven't added anything there. If prices remain at these levels for a couple of years, and we don't add 3 million bpd, I think we are done. There is a huge economic incentive right now to bring production online. But it can take years to bring some of these projects from the drawing board to production. But by 2010, we will have likely had 5 years of very high oil prices – and that is sufficient time to have brought some of these marginal projects into production.

From where I currently sit, I view it as a 90% probability that we peak by 2012. We could be there now, and I think we will know before too long if new production doesn't come online at these prices.

But by 2010, we will have likely had 5 years of very high oil prices – and that is sufficient time to have brought some of these marginal projects into production.

The longer it takes to bring those projects into production, the less likely it is they will be able to counter depletion. I'd say if they take until 2010, they will just slow the rate of decline rather than bring the extra 3 million barrels online. IMO, if it can't come online quickly, it can't postpone the peak.

Crude production (independent of all liquids) has been on a jagged plateau since May 2005 with a couple of spikes back near the May 2005 peak and most of it sitting in the 73 mbpd band. This year's megaprojects should definitely show an impact if most of them arrive on time. If we don't begin to see that impact this year then it's not going to appear, in my opinion. 2008 will be the 4th year of prices above $38 per barrel. We should begin to see the leading edge of this promised oil and if it doesn't appear now, after 4 years of $38+ per barrel oil and after 8 straight years of oil price increases, then its not happening.

Thank you, Robert.

People have attacked you in the past because you didn't subscribe to the "peak is now" theory but in 100 years, someone will look back and see that some people thought peak was in 2005 and some thought it was 2010 and they were all pretty close to being right. I also agree with your observation that economic incentives to bring new production online now are there and that if we don't see a bump up in crude by 2010 then we're probably on the downslope for crude. Personally I am still holding to that May 2005 peak for crude, at least til the data says otherwise.

A final thought for you (and others) - if we do see new projects come online but crude production either does not rise or rises only very slightly between now and 2010, would that then concern you about the underlying rates of decline? That's one of my biggest concerns - will rate of decline exceed the rate of our ability to adapt?

I am not sure OPEC is getting more value for their oil, it is probably to a large degree the dollar inflating.

Since most OPEC members maintain large reserves of dollars each time the dollar declines they loose quite a bit of real purchasing power which is a lot of incentive to with hold more oil to regain the store of value. Eventually of course they will decide to convert out of the dollar and are probably diversifying as much as possible given the dollar peg of the regions currencies.

So its sort of a arms race to the bottom. As oil goes higher the dollar is devalued which lessens the incentive of these large dollar holders to pump more oil.

I have to think that by the end of the year we may see a lot of these contries depeg from the dollar move off the dollar as pricing for oil and fully diversify their dollar holding.

Since a big part of a fiat currencies value is simple faith in the creator of the currency that they will ensure interest rates and inflation of the currency are inline to make it a store of value this movement should be a serious blow to the dollar.

RR [& GreyZone]

thanks for u'r work;as 'reading between the lines' is so needed [hell we don't even have lines].
as i attempt to maneuver me & mine [& a few listeners] thru the decisions today that will increase our odds in the upcoming minefields the info matters.As Matt Simmons says the data is the prerequisite for mitigation.

Thanks again.

And here's the API's take...

U.S. crude inventories down 1.7 mln barrels last week: API

SAN FRANCISCO (MarketWatch) - U.S. crude inventories fell by 1.7 million barrels to 307.3 million barrels in the week ending Feb. 22, the American Petroleum Institute reported on Wednesday. Distillate stocks fell by 1.2 million barrels to 121.7 million barrels in the same period, while gasoline stocks dropped by 1.0 million barrels to 221.7 million barrels, API said. API uses different methods than the Energy Information Administration to calculate inventories.

Other factors like weather(snowstorms) also play a role in gasoline demand.

How are today's gasoline inventories relevant to summer inventories, given that different blends are used?

OPEC production grew in January in response to higher prices. Faced with higher prices for grains some nations may not be able to afford luxury driving as much. In a typical year the world used more oil + products in the winter than the summer due to heating oil demands. After the spring thaw happens the inventories might rise further. OPEC has not peaked in production. There has been no worldwide peak oil + liquids confirmed either. World oil inventories rose in January a month that under normal circumstances was more likely to require draws on inventory due to colder weather.

Don't confuse a US inventory build with a world inventory build. From the EIA:

World oil production in January 2008: 86.21 mbpd
World oil consumption in January 2008: 86.97 mbpd
World oil net stocks draw in January 2008: .75 mbpd

According to the EIA, world net stocks have been drawing down throughout 2007 and early 2008 in every month except April where there was a paltry build of .03 mbpd.

Exports drop... (ELM)

C+C still peaked in 2005 ...

OPEC considers cutting production at $100 oil...

Total liquids now includes XTL causing some rather strange economic adjustments and pressure on world food supplies...

Major divergence of estimates on world production figures between EIA, IEA, and MOMR...

EIA month on month revising down its world production estimates...

Thanks for your insight RR, very much appreciated, and all others.

As far as the SPR, I think the administration has had this figured out for quite some time, now we see just more evidence of this. Any filling HAS to be done now while there is still good production, no telling when it will dip. OPEC talk of cuts even in the face of $100+ crude is the last of the evidence I had expected. To me, they HAVE to cut production, and cut soon.

The refiners have a problem, they have to pass costs along in finished products, but can't jack the price any farther than they have so far or they won't be able to sell the volume they need to move. Note the utilization figures... Can't all be blamed on turnarounds. Similar talk occurred last May then was mysteriously dropped.

Even with high crude costs, XOM reported all time record profits for ANY company ever last quarter. The saving grace in the face of low crack spreads? Their own internal production company. I would love to see the number they are using internally for production cost/barrel, lol.

Within Amoco there was always an internal struggle going on between Production, Refining and Marketing over the numbers used to represent product movements between subsidiaries. Throughout most of the 90s, Refining seemed to come out on the short end of the stick more often than not. Marketing was given anything it needed to sell more product, Production was king as the provider of riches, Refining was just kind of a necessary evil, hehe. Regardless, this never stopped good total financials.

They found the pinch point to control demand last Summer and again last Fall. Where will it be this next driving season? The price of energy has already put the hurt on the economy, slowing it quite a bit (early R word) and initiating some fairly serious inflation. I had been thinking $4/gallon gas was a forgone conclusion come May or so. Now I am not so sure. A surge to $3.60/3.70 or so may be all the consumer needs to hit the next step of belt-tightening inducing a bit more demand destruction. Enough to cause the refiners serious pain.

How tight can the crack spread get? This is like watching a slow motion train wreck.

US demand is flat or falling. The oil industry is going to take a hit on refining. They're going to lose volume. It's unavoidable in the current economic climate. In all, it's desirable. Better to just adjust and send the high prices on down the food chain. Sure, you'll have a drop off in demand. But that's good. It will build in efficiencies. Demand needs to start coming down. In the meantime, the oil industry would be well advised to invest in alternatives so they can hedge against declining reserves. Yeah, it's not as sexy as the grand adventure that is oil. But they are energy companies after all. If they want a future they will have to move beyond oil.

Yes, Bush is wise to build the reserves but he's pretty much a moron when it comes to other things. He thinks only with the oil half of his brain. Renewables need to be part of the picture. They are the future. And while oil is the present reality now our current dependence is resulting in serious long-term harm. Bush is positioned to crash our economy and fight a war for the remaining oil -- all other comers be damned. This is not a formula for a prosperous 21rst century. It's a formula for brutality.

OPEC has to cut production because there is no demand? Now that's kinda funny. There is every evidence that the producers are unable to meet demand. World stocks are FALLING and have been for 12 out of 13 months. Yeah, I could see a need to cut production if there were any real or substantial builds. But this isn't occurring. They're cutting to husband their resources and probably to save Saudi's groaning wells.

According to the EIA, OPEC production is set to rise by 600,000 to 800,000 barrels per day in the coming months. Now they are set to cut or remain stable for springtime? How will this result in the wave of new oil predicted?

By the same count the former USSR is expected also to, year on year, add 600,000 to 800,000 barrels per day in new capacity come spring. But most accounts say increases in the former USSR are flattening.

Where is evidence of all this new oil? Price? Supply? Stock builds? When I see movement in these three then I'll agree with you. Until then, we're in the demand destruction environment to stay. And yes, the bump in the plateau is an encouraging sign. But given total world exports in net decline (ELM) I don't think a slight bump over a few month period is going to solve the supply problem.

If the U.S. is "addicted to oil" then Bush is one the pushers of that addiction. He resisted any meaningful changes to CAFE until he could not resist them any more politically. He cut budgets for renewable energy research at the National Renewable Energy Lab until there were not enough people left there to do a photo op with when he came to visit.

He recently asked the Saudis if they would increase oil production. They said no and he just implied that they did not have it to produce. That is a nice convenient way of saying his great friends in the Saudi power structure told him to go take a hike. Bush has always been for more production and tacitly endorsed Cheney's statement that "conservation is a personal virtue but not an energy policy".

It's inflation, stupid (rapping on my skull). I was expecting oil to be over $100 per barrel back when the Fed lowered the FF rate by 75 basis points but it didn't rise. Today, Ben finally made it clear that he doesn't give a damn about inflation and low and behold the price of oil starts to stick above $100. This price is pretty well following the $ price of the Euro.

Thanks Robert for the work you do on this site and your own.
As an auto industry insider I have an appreciation for the practical insight you bring to your posts.

My question is, where is all the ethanol going?

No one I know uses E85 in their car, even managers who get their fuel paid for, due to poor mileage.
Can it all be going to replace MTBE?
It seems we see the external costs in ethanol reflected in food and other commodities, yet we never see the ethanol itself.
Is it just a drop in the bucket?

They can blend up to 15% in conventional engines. The ethanol blend in fuel keeps getting higher in the US. You don't see it because it's in your gas tank.

Thanks for replying but ethanol has been blended into the gasoline I buy at 10% since the 1970's.
The term used in those days was "gasohol".
Michigan law states that pumps must carry a sign notifying consumers of that percentage.
This is clearly something else.
The rate at which farmland is being converted to fuel production argues that we should be swimming in the stuff.
Where is it?

I would like to elaborate on what you had to say Spaceman...
What bothers me is the farmland which is being converted to fuel production. It seems like were trying to solve one problem by creating another.
Is there possibly a way were ethanol production can be maintained without seeing a very negative affect on food markets?
A possible alternative to oil production should not be creating a problem for food production.
If we continue down this road, maybe we won't only be concerned about peak oil but peak everything!