This Week in Petroleum 5-16-07

2nd Update

This Week in Petroleum was just released, and the focus was the gasoline situation. Some excerpts:

Why are gasoline prices so high?

Gasoline inventories have recently been drawn down at a dramatic rate to bridge the gap between supply and demand (see Figure 4, in the Weekly Petroleum Status Report (WPSR)). Over 12 consecutive weeks during February, March, and April, total gasoline inventories declined by a cumulative total of more than 34 million barrels (15 percent). This is the sharpest decline in gasoline inventories over a consecutive 12-week period in EIA’s recorded historical data.

Is there an end in sight or will gasoline prices continue to rise all summer?

Although gasoline inventories are expected to remain lower than normal throughout the summer, high prices have encouraged more supply and inventories have increased slightly the last two weeks. Domestic gasoline production has increased by more than 500,000 barrels per day in the last three weeks and total gasoline imports (including blending components) during the week ending May 11, rose above 1.5 million barrels per day, making that week the fifth highest weekly import volume ever and the highest since last May. Should imports continue at such levels and more domestic refinery capacity come back online, supplies will improve and wholesale prices could come down. However, with gasoline inventories likely to remain low all summer, retail prices are expected to remain close to $3 per gallon during the entire summer season. Prices could rise again towards the end of summer if demand surges, as it often does, in late July and August.


This week’s numbers were just released. I was correct, in that we had a build. I was also correct that it would fall short of what we need to stay out of an unprecedented Memorial Day inventory situation:

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) rose by 1.0 million barrels compared to the previous week. At 342.2 million barrels, U.S. crude oil inventories are just below the upper end of the average range for this time of year. Total motor gasoline inventories climbed by 1.7 million barrels last week, but remain well below the lower end of the average range. Distillate fuel inventories increased by 1.0 million barrels per day, and are at the upper end of the average range for this time of year.

So, we now have 2 weeks in which to gain (200.7-195.2), or 5.5 million barrels, else we set a record low for Memorial Day. So we will need to average 2.75 million barrels each of the next two weeks. Impossible? No. Unlikely? Yes. The significance? I have been kicking that around. We could get off with no real problems, other than higher prices. What these low inventory levels do is increase the level of risk in case of an emergency of some sort. If a hurricane shuts down major production, we could see gas outages and a very fast runup in gasoline prices. Time will tell whether we luck out this summer.

I will update this as soon as this week’s report is released. But as I await the report, I wondered just how far we have to go to dig ourselves out of the hole we are currently in on gasoline inventories.

Last week’s report showed gasoline stocks at 193.5 million barrels. Just eyeballing the gasoline inventory graph, the 5-year average for gasoline on Memorial Day – the traditional start of summer driving season – ranges from a low of 208 million barrels to a high of 218 million barrels. Counting last week’s numbers, which will be reported in today’s This Week in Petroleum (TWIP), we have 3 weeks to get back to the lower end of the range. That would require a weekly build of (208 – 193.5)/3, or 4.8 million barrels a week. Impossible?

No, but it looks unlikely. The largest weekly gain that was ever recorded happened the week of May 28th in 1993. The increase in gasoline stocks that week was 11.5 million barrels. That appears to be quite an anomaly, because the next highest May increase was in 1994 at 5.6 million barrels. If we only look at the data since 2000 – which would be more in line with the current supply/demand picture – the largest May gain occurred in 2001 at 4.3 million barrels.

So, in order to avoid going into the summer driving season below the lower end of the range, we would have to see 3 consecutive weekly gains that have not been seen this century – fueled by very strong import levels (or record-breaking demand destruction). So, again I go out on a little limb and say that we will enter summer driving season below the bottom of the average range.

If we have an uneventful summer, prices may not go too much higher. But in my opinion we will go through the summer about one gulf hurricane away from nationwide average gasoline prices rushing past $4/gallon. They could go much higher in the event of a major refinery disruption ala Hurricane Katrina. It is really hard to imagine where gasoline prices could top out given current inventory levels.

Going for a Record?

To put the matter in a bit more perspective, here are the Memorial Day gasoline inventory levels since 1990.

Date Vol (million bbl)
May 25, 1990 218.5
May 31, 1991 215.7
May 29, 1992 218.0
May 28, 1993 229.9
May 27, 1994 214.4
May 26, 1995 210.0
May 31, 1996 206.1
May 30, 1997 200.7
May 29, 1998 218.2
May 28, 1999 223.0
May 26, 2000 201.1
May 25, 2001 208.0
May 31, 2002 215.9
May 30, 2003 207.3
May 28, 2004 204.3
May 27, 2005 216.7
May 26, 2006 209.3

Table 1. End of May Gasoline Inventories since 1990

The lowest number on the list is 1997 at 200.7 million barrels. Even to reach that number, we would have to gain (200.7-193.5)/3, or 2.4 million barrels for the next 3 weeks (7.2 million barrels total). And while I think we are likely to see a gain in inventories this week as higher prices continue to bite into demand, we aren’t likely to gain 7.2 million barrels over the next 3 weeks. So, again I go out on a limb and say we will hit Memorial Day with record low inventory levels.

How TWIP is Written

I recently asked Doug MacIntyre how he goes about writing TWIP. Here was his response:

Actually, I wish I knew sometimes. As a write this comment, it’s Tuesday afternoon and I have NO idea what my hook or topic will be (although gasoline does seem to be an obvious choice, not every report can be on gasoline). Sometimes it is mostly written by Tuesday, but most of the time, not a word has been written until Wednesday morning, plus I have to wait until I write those pithy 4 paragraphs of text that gets released with the data at 10:30 am ET! Often, the issues that take the least amount of time seem to be the ones I like the best. Anyway, right now, I’m at a blank for what tomorrow’s edition will be.

BTW, while I write the vast majority of them, I have some colleagues that pitch in every now and then, which I truly appreciate!

I told him he could always write about the blogger who had the amazing foresight months ago to start warning of potential record gasoline prices – based on his weekly reading of TWIP and the EIA statistics. 🙂

17 thoughts on “This Week in Petroleum 5-16-07”

  1. Good call, Robert. And while I am here I am going to toss another question at you. I know you believe peak is yet to arrive though it is close in your opinion. Given the current state of the market and how long we have sat on this production plateau, have your estimates for actual peak date changed at all? If so, how? And please, do not feel obligated to directly answer this question today. It’s just another one to throw on the pile if/when you have time.

  2. Gasoline inventories up 1.7 million barrels to 195.2. That’s an improvement but less than 1/2 what we need to avoid historic lows on Memorial Day.

  3. Skimming through the numbers I noticed something interesting. Look at PADD III reformulated an conventional retail prices. Reformulated is nearly 7 cents per gallon cheaper than conventional.

    Can someone make sense of this? It would seem to me the added expense of making RBOB and then buying ethanol should make it sell at a slight premium. Or could it be that conventional and reformlated operate on their own supply & demand. People who live in the cities are reducing their consumption, leading to lower prices.

    CBOT shows June ethanol at $2.12/gallon while NYMERC has RBOB at $2.28. That might explain some of the difference.

  4. kingofkaty,

    The reason RFG retail gasoline prices in PADD III are lower than conventional is almost surely related to the location of the RFG areas in this region. They are big cities that are VERY close to refineries and thus tend to see significantly lower prices. Even though RFG is more costly to produce, prices are set based on local market conditions and I just think the RFG areas are more well-supplied on average, than the conventional areas, in PADD III.

    Doug MacIntyre

  5. Doug – The only 2 RFG cities in PADD III are Houston and Dallas.

    Your explanation certainly works for Houston. But there aren’t any large refineries in Dallas. They would get their gasoline from Explorer pipeline (from Houston, Beaumont/Pt. Arthur/Lake Charles).

    I suspect that Houston refineries are making more RBOB than is required locally. I’ve also noticed that ridership on Metro is up and traffic is down. It seems that higher prices in Houston are changing behavior. Doesn’t really help me.

    I live outside the metro district approximately 14 miles from the office. Although not well served by public transporation, I am going to experiment with commuting this summer and write about it.

  6. Gulf Coast spot market gasoline (physical) exploded to the upside today (up 15 cpg) as more refineries reported reduced run rates (latest = Valero at Houston and COP at Sweeney).

    With gasoline demand up again per the EIA stats released today and the highest prices in U.S. history in Grp III (spot market gasoline FOB Tulsa = $2.79/G, which also makes it the most expensive gasoline in the nation!), the sky is the limit on how high gasoline and crack spreads can go this summer.

    If you don’t believe me, just wait until the “H” word gets muttered in the Gulf Coast soon (H = hurricane)!

  7. Given the current state of the market and how long we have sat on this production plateau, have your estimates for actual peak date changed at all? If so, how?

    My views haven’t changed, but I have hopes that we may get some clarity at some point this year. In the U.S., the refinery bottleneck is keeping crude stocks high, so we are amply supplied. Therefore, we won’t be asking OPEC to open up the taps, as it wouldn’t help us (although it would drive down prices).

    The OECD as a whole does seem to be undersupplied, so the signal I am waiting for is for Saudi to open the taps when the OECD inventory situation starts to get low. If they don’t, then I suspect they can’t.

    Cheers, Robert

  8. Question for Doug, if you are still hanging about. There is some discussion over at The Oil Drum about minimum operating levels in the system, defined as:

    A description of this Minimum Operating level clipped from an EIA publication follows. “…maintaining minimum operating levels (e.g., gasoline must be present in the pipeline at all times to push product further through the pipe. When actual inventories drop below minimum operating levels, the system effectively may be running on empty. EIA reported that PADD II inventory levels in May and June 2000 were at or near minimum operating levels.

    The suggestion was made the minimum operating levels were 46 million barrels for PADD II, 27 million barrels for PADD V, and 170 million barrels for the entire system. Can you shed some light on this? If these numbers are accurate, we are certainly skating on thin ice as we enter hurricane season.

    Cheers, Robert

  9. Robert,

    The National Petroleum Council has done some work on Minimum Operating Levels (minops) in the past, but nothing too recent. EIA stop using this concept several years ago because the bottom line is that we don’t really know what the minops are. Instead, we like to point people to Figure 4 in the WPSR (linked to in TWIP this week) as an indication of how low or high gasoline inventories are. We are also now showing a Days of Supply chart on the Gasoline page of TWIP. But I have another chart on Days Supply at my disposal and it shows that for this time of year, from 2003-2006, we were between 22-24 days of supply (current inventories / 4-wk avg. demand), but we are only at 21 now. In fact, the only other times Days of Supply have been lower since the beginning of 2003 was late summer 2003, late summer 2005, and the fall of 2003.

    Doug MacIntyre

  10. Not to worry, the FTCR has solved the problem for us:

    FTCR Letter to CA Lawmakers

    How does government force refiners to make more investment? Do we run down to the bank and seize company money? Do we lock up the managers, engineers, contractors, and operators in a gulag and force them to build more refinery capacity?

    I’m sure FTCR did not intend to be humorous but their letter gave me a chuckle over how utterly clueless some people can be.

  11. I’m sure FTCR did not intend to be humorous but their letter gave me a chuckle over how utterly clueless some people can be.

    Those people are more disconnected from reality than any group I have ever seen. No concept of econmics, or supply and demand. No understanding of why prices rise and fall. They think prices rise when oil companies want to make more money.

    I was reading an article over there this morning, and they were saying that gasoline should be $2.20 a gallon. If you add up just the crude costs and the taxes, you are already at $2.00 a gallon. So, now we have $0.20 to refine, distribute, pay the refiner, and pay the retailer. They are a mighty generous lot.

    Cheers, Robert

  12. But if you want to see a grand prize winner for cluelessness, check out this guy:

    Big Oil needs to be held accountable

    The oil company executives use every lame and untruthful excuse possible for raising the cost of these fuels so that they can put untold millions in their private bank accounts. The latest excuse is, “Not enough refineries.” So, when will even one of our gallant leaders ask the question: “If refineries are the problem, why isn’t there a gas shortage?”

    If gas prices hadn’t risen, attracted more imports, and stemmed demand a bit, he wouldn’t have to ask why there isn’t a gas shortage. And if a hurricane hits the gulf this summer, he won’t have to ask.

    I was going to respond to him, but you have to register. Too much trouble.

  13. Now for another point of view:

    George Will: Posturing at the Pumps

    Now if FCTR wanted more refining capacity in CA, then they should call for opening up offshore CA to oil production and the 1002 area in Alaska. By law TAPS crude must be delivered to the US. Increasing production by 1-2 million barrels in AK and CA would induce refineries in CA to expand.

    Come to think of it. There is the potential for up to 1 billion barrels of oil in the Point Arguello field offshore Santa Barbara. (At 1990 prices and technology the reserves estimates were 300-500 million barrels. With $60 crude oil and proven heavy oil recovery there are probably a lot more reserves today). Chevron was forced to abandon the project in the 1990’s over disputes with the state on tankering and other obstructions. A subsidiary of Plains Exploration operates it now. The technology is similar to the Venezuelan heavy oil projects.

    If FCTR wanted to do something constructive, they could demand that Pt. A be opened up to its full potential.

  14. From the George Will link:

    Democrats, seething at the injustice of gasoline prices, have sprung to the aid of embattled motorists. So resolute are Democrats about defending the downtrodden, they are undeterred by the fact that motorists, not acting like people trodden upon, are driving more than ever. Gasoline consumption has increased 2.14 percent during the past year.

    This is what just kills me. People demand more and more, and then don’t understand why the price goes up. We do not possess crystal balls, and in a cyclical industry, one is very careful about overbuilding capacity.

    Cheers, Robert

  15. Paging Doug MacIntyre. Doug, if you are still lurking about, I had a thought. One thing that might be of a lot of interest to cover in an upcoming version of TWIP is the role of imports – both of crude and of finished products. We are counting heavily on imports to keep us supplied this summer. But where do they generally come from? If prices go up here, how long does it take them to get a cargo loaded, ship it, and have it reach our shores?

    Those are the kinds of questions I see pop up again and again with respect to imports.

    Cheers, Robert

    P.S. The Oil Drum has asked me to post this essay over there, so you should see it going up there in the next couple of days.

  16. One thing that might be of a lot of interest to cover in an upcoming version of TWIP is the role of imports – both of crude and of finished products. We are counting heavily on imports to keep us supplied this summer. But where do they generally come from?

    How much would US consumers pay for this gas? Don’t answer yet, with this deal you also have to pay with dollars that are falling on all forex fronts.

    But wait, there is more: If it gets to a bidding war, things get really ugly. More money to OPEC means less money for investing in the US. With a smaller foreign investment comes higher interest rates (quote independent of Fed policy, sorry Mr. Bernanke).

    And with this deal you also get increased funding for terror, further slowing in the US housing market and record summer gas prices.

    Call 1-800-I-LOVE-GAS to get yours today…

  17. I know that everyone is concerned about the high price of gasoline and consumers are feeling anger towards the ‘big oil’ companies for taking their hard earned dollars at the gas pump. I don’t like high fuel prices either, but having worked in the oil refining business for 33 years I have experienced first hand the oil industry’s side of the story. The 70’s and 80’s were difficult times for the oil refiners in America. Nevertheless, I can unequivocally say that I never saw anything but integrity, ingenuity and hard work by the great majority of those I worked with as the industry struggled to bring about the miracle of providing our country with the cheapest and most cost effective energy possible, even as the refining complex was contracting and consolidating in the face of abysmal profits, higher government taxes, more regulation, more EPA mandates, and all the other enormous challenges and risks inherent in the business. Over the last 30 years we have seen half of America’s oil refineries shut down because they simply couldn’t make enough profit to justify the high cost of staying in business. I remember one of my old bosses telling me after I hired on with Phillips Petroleum in 1973 that the “oil industry has provided our country with the highest standard of living the world has ever known because they have made available the cheap and abundant energy that has built America”. It has always been a mystery to me that in spite of this truth the oil companies have routinely been vilified and demonized by politicians looking for votes from uninformed voters and consumers who feel that cheap and abundant energy is their birthright and from the media who seems to feel that beating up on the oil companies is good for their bottom line. But the energy landscape is changing now, and tirades, tantrums, and irrational behavior are not going to bring back low gasoline prices. I believe there has never been a more important time than right now for voters, consumers, and political leaders to really become educated about the issues facing our energy complex and begin to work constructively to deal with the new energy reality of a tighter gasoline supply/demand scenario, more expensive to find and develop oil, and the hyperinflationary operating costs that are plaguing every facet of the oil industry. I can predict with utmost surety that if misguided politicians succeed with the insane political proposals to levy yet more taxes via a windfall profits tax on the oil companies as a means of punishing them for the high price of gasoline, we will soon see even more dependency on imported oil, potential shortages and still higher prices. If you think the last five years have been plagued with high gasoline prices just wait to see what this kind of political grandstanding brings in the next five years. I hope that lawmakers on both sides of the aisle will take the time to truly research the facts about our energy problems before they make populist statements like the one Mrs. Clinton made in her recent comment about “taking away Exxon’s profits”. These kinds of statements demonstrate incredible ignorance and do nothing to help lower the price of gasoline. I believe what America needs are cool headed government leaders who understand how markets function and can work with consumers, voters and oil industry leaders to develop a viable energy strategy that will help and not hinder as our nation transitions to our new energy reality.

Comments are closed.