The inventories are higher because the imports just keep coming. OPEC claim they are cutting production but there is no sign of it in imports. Demand is winning for sure and OPEC are losing by pumping away into lower prices.

Supply may very well be a whole lot more inelastic than is appreciated. I think there are 2 reasons for this.
for example,once an offshore facility starts producing you have to earn back the daily lease rate for the rig. As long as the revenues cover your costs you will produce regardless of your views on pricing. And as it gets harder to get oil out of the ground and the costs increase the pressure to produce increases.
Secondly, stopping and (re)starting a field can damage it.
WeekendPeak

It seems like low refinery utilization is going to be a problem, both in the US and around the world. This is another Johnson Rice graph:

If refineries aren't working at close to full capacity, it seems like the more marginal ones run into financial difficulty. It seems like the way we have managed to attract oil imports over the years is by having refineries, when others didn't. Now with more refineries opening around the world, and total production and demand likely falling, there will be less oil in relationship to refineries, and some of the refineries will need to close. I am guessing some of the US refineries will be ones to close.

Here are some US "Import Land" Data, 1997 to 2007 (last year for which we have annual data, EIA):

Consumption:

1997: 18.6 mbpd
2007: 20.7 (+1.1%/year*)

Crude Oil Production:

1997: 6.5 mbpd
2007: 5.1 (-2.4%/year)

Total Liquids Production:

1997: 9.5 mbpd
2007: 8.5 (-1.1%/year)

Net Imports:

1997: 9.6 mbpd
2007: 12.2 (+2.3%/year)

*Annual rate of change over 10 year period

At a -2.4%/year decline rate, US crude oil production would be down to 4.0 mbpd in 2017. So, an ongoing long term reduction in net exports would have to be achieved after consumption fell enough to first offset the long term decline in domestic production.

Using four week running average numbers, the total product supplied through the second week of January, 2007 was 20.2 mbpd, versus 19.7 mbpd for the same time period in 2009 (decline rate of -1.2%/year). Net imports fell from 11.9 mbpd (1/07) to 11.5 mbpd (1/09), four week average. It looks like the EIA is estimating a domestic crude production drop of about 350,000 bpd over the same time period (1/07 to 1/09).

Note that post-peak exporters wanting to maintain constant net exports have a similar problem--their consumption would have to fall at about the same volumetric rate that their production falls. In the case of Mexico (in order to maintain flat net exports), I estimate that a production decline rate of -10%/year over a four year period would require an annual decline in consumption of about -16%/year over the same time period (dropping by half about every 4.5 years).

Of the money we have seen thrown around thus far let me ask you this, that 168 billion that our country borrowed to give away to us in the form of an "economic stimulus package" ...did it do a darn thing to create jobs or stimulate our economy? NO, nothing. And we borrowed the money from China.

This past year the high cost of gas nearly destroyed our economy and society. More people lost jobs and homes as a direct result of that than any other factor in our history.

Fannie and Freddie continue to get all the blame. Of all the homes I have seen lost in my area SW FL and believe me I have seen many, none were due to an adjustable mortgage. They were due to lack of work.

Families went broke at the pump alone. Then added to that most saw record rate hikes at their utility companies. The high cost of fuel resulted in higher production and shipping costs that were passed on to the consumer, in most cases higher prices for smaller packaging.

Consumers tightened their belts, cut back, went out to eat less or stopped totally. Drove around on tires that needed replacing longer, some even quit buying medicines they really need.Unfortunately cutting back and spending less results in even more layoffs. A real economical catch-22.

And, as we are doing the happy dance around the lower prices at the pumps OPEC is planning to cut production to raise prices. They are even getting Russia in on the cutbacks. Oil is finite. We have used up the easy to get to reserves already. It will run out one day.

We have so much available to us. Solar and Wind are free sources of energy. Of course to get the harnessing process set up is somewhat costly it is still free energy.

It would cost the equivalent of 60 cents per gallon to charge and drive an electric car. The electricity to charge the car could be generated by solar or wind at least in part and in most cases totally.

If all gasoline cars, trucks, and suv’s instead had plug-in electric drive trains, the amount of electricity needed to replace gasoline is about equal to the estimated wind energy potential of the state of North Dakota. What a powerful resources we have neglected.

Jeff Wilson has a profound new book out called The Manhattan Project of 2009 Energy Independence Now. http://www.themanhattanprojectof2009.com Powerful, powerful book! Also, if you think electric cars are way out there in some futuristic lala land please check out the web site for a company Better Place. http://www.betterplace.com/ they are setting up infrastructures in San Francisco, San Jose and Oakland as well as the state of Hawaii to accommodate electric car use.

I think we need to rethink all these bailouts and stimulus packages. We need to use some of these billions to bail America out of it's dependence on foreign oil. Create clean cheap energy, create millions of badly needed new green collar jobs and get out from under the grip foreign oil has on us. What a win -win situation that would be for America at large

And for those interested in monitoring demand, the following table summarizes the year-over-year change in implied gasoline demand based on trailing four week averages.

12/19/2008 1/2/2009 1/2/2009 1/9/2009

DOE -2.7% -2.2% -2.2% -2.1%

MasterCard Survey -2.1% -3.0% -4.0% -3.6%

A couple of comments obviously if you look at DOE vs Master Card the error in the demand calculation is large i.e the exact change in demand is something like 3% +/- 2%

But even with that we may well be seeing two effects showing up in the MasterCard data.
One for people with money now that gasoline is cheaper such that 20 dollars gives at least a half tank for most people people pulling in to top off and by something may well now just pay cash instead of charging at the pump.
I think this effect is small but it certainly exists I know for a fact I tend to pay cash for purchases under 20 while using a credit/debit card for bigger purchases so the size of our bills vis the purchase effect is real.

Next and probably more important is it looks like we are seeing a real loss of access t o credit i.e people aren't charging gasoline because they no longer have credit.
Eyeballing the figures it looks like about a real 1%-2% difference which fits VERY well with the rise in unemployment.

As unemployment increases there is churn in the people who are unemployed with a lot of the ones who have been unemployed for a while generally finally taking part time or low wage work by the time they do this they have no credit.

So we may be seeing what I thought we would see which is even as unemployment increases the fuel usage starts to flatten as people use more gasoline to make less money and use more gasoline searching for work as jobs are difficult to get. They may drive to say five different businesses in one day turning in applications for example.

As time goes on we would expect the MasterCard survey and the DOE to continue to diverge over time and also same with the VMT reports VMT will flatten but loss of credit will be continuing.

But when you look at the values for each of the products supplied, everything is down except residual oil.

Imports of gasoline and blending components has dropped pretty significantly over the past 4 weeks and the import of kerosene jet fuel is nearly nonexistent.

In the past this has looked like the "waste byproduct" of Europe where diesel fuel is much more important. For the moment, it looks very different.

Here is what I think is happening.

First and foremost we have seen a tremendous amount of contango lately in the oil market in fact the difference between the front month and further out futures has reached historic proportions. You can make a lot of money buying oil and storing it for a few months for later delivery.

Next this has brought speculative interest into the oil markets again but its speculators with storage facilities that act as a proxy for producers. This can be seen in the large builds at Cushing which are a result of the way the Nymex market works and to some extent along the gulf cost. The fact that PADD V or the west coast is not changing much is your key indicator that its not oil building up because of demand decline. The West Coast market is isolated from the rest of the US and as you can see its well supplied but neither good nor bad.

So this means in my opinion that speculators are now sitting on between 30-60 million barrels of oil or so. Or basically a lot of oil. They have built inventory by buying the front month cheap and selling delivery contract for later months speculating that the front month will fall.

Now as the front month price falls people that have purchased futures for delivery will close out at a certain spread to stop the loss vs the front month. I.e they will settle their nearer term futures contract esp the front month for cash.

This is in my opinion the important issue with the current oil market the speculators who went short with oil for delivery are making out like bandits as their contracts are settled for cash and not delivery. Then if they have more storage they buy a few front months to keep filling.

Now it gets a bit more complex because these speculators as a group are setting on enough oil that they are now market movers and act like a virtual exporter. As long as they don't actually have to deliver or can refill storage with the contango going there way they can keep playing the game. In general whats happening is they are not actually delivering a lot of oil but most often settling for cash.

They have enough oil that has produced a nice profit playing this game over the last several month that they can even sell it cheap i.e the same oil has rolled trough the contango arbitrage a few times that they would only need say 10 dollars a barrel to break even thus they have oil they can in effect flood the market with on the front month forcing down the price of the front month contract to keep the game going.

Whats important to understand is physically this is the same barrels of oil that have been around for several months. As long as the contracts are settled for cash its not going anywhere and its not oil coming out of OPEC or being delivered to the US recently. Some of this oil has been in storage now for 3-4 months.

If I'm right then I can tell you whats going to happen assuming that at some point real monthly oil imports begin to fall. The market will go into backwardation once it does these guys will close their longer term delivery contracts for cash and begin to sell the oil on the front month for real. If they can't force the contango then they will finally start selling down their stored oil on the front month. I'm pretty sure this unwind of the "carry trade" will create some impressive backwardation similar to what we have seen for contango.

From here on out US storage will begin to fall and the price of oil will rise steadily.

Now thats what I think will happen the other route is that the contango in the market collapses and the price goes into backwardation with falling prices in the futures month.

When is the game up ? When the speculators run out of places to store oil and when consumers start taking delivery on the front month and not hedging i.e we finally start really burning the oil. Basically at some point the market will realize that the front month contract is going to fall and the contango will collapse.

Whats important is that the US now has a lot of oil in storage thats owned by speculators and has been setting there for months as a hedge for shorting the market.
Its not oil delivered by OPEC !

Looks like inventory administrators had a good grasp of reality all the time. They sold when oil was expensive, and now are buying it back.

Memmel's speculation is very interesting and compelling. Was the following url posted on Theoildrum - http://www.cbsnews.com/video/watch/?id=4713382n ??
And we still have some commentators here who believe that oil pricing has been just a result of supply and demand this last year, not driven by speculators. Oh yeah!! Murray

It is interesting the gasoline prices are quite stable with almost no recent drop. Small increases in the Pittsburgh area over the last 2 weeks.

Regarding the effect of a period of shut in.
Two very important words, as usual, "It Depends".
I am not an engineer, but have owned and operated some production.
Porosity, permeability, reservoir rock characteristics, depth, damage from over production, oil gravity, just a few of the variables.

Water drive or gas drive reservoir? Heavy secondary recovery such as heavy water flooding at Gahwar and others causes coning of oil flowing to vertical well bores that are being pulled hard. Let that rest for a while and the oil water contact will eliminate the cone and assist new renewed production, for a very short time. Eventually they become water wells, and imagine that with the oil water contact hitting a horizontal well, as Simmons has illustrated in his presentations.

No knowledge of deep gulf of mexico issues at all, but the natural geologic pressure would perhaps have a rest be productive on the short term? Again it depends.

Senor "West Texas" knows very well that lots of strippers can only be pumped after several days, (weeks?) of rest to let the oil return to te well bore. My tiny royalty checks from some strippers have stopped at these prices.

Mr Nate, I am msot eager to see your natural gas hits the cliff piece. Coming soon?

I look at what happened on a local level and extrapolate: when oil prices were high every rig was working, every well that could be produced was produced.

All the activity during that period is showing up in production figures today--figure you get about a year's increased production due to that.

Now I see rigs stacked, drilling prospects scuttled.

In a year or so, I suspect you'll see that reflected in production numbers.

Has anyone noticed that Brent crude is almost 8 dollars more per barrel than New York? Won't this attract the attention of middle east oil suppliers and decrease supply to the U.S. ? This is the widest spread I've ever seen. What will keep these tankers which are being used for storage from being diverted to Europe to take advantage of the higher price/demand?

If Europe is willing to pay a lot more for oil than we are, our economy might continue to wither indefinitely.