This Week in Petroleum 11-7-07

Updated Following Report Release

About 10 seconds after the report was released, I scanned down and found what I was looking for: U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) fell by 0.8 million barrels compared to the previous week. I turned to the guy sitting next to me, as we had been talking about this today, and I said “$100 oil may have to wait for another day. The inventory draw was half what was expected.” We could still pop $100 today, but this inventory report doesn’t favor that. A higher expected draw was already factored in, so I don’t think this supports a quick move up from the current price level. But I wouldn’t put $1,000 on it.

However, we are still close enough that it won’t take much volatility to push oil over $100. A single negative geopolitical event should do it. But in the absence of a brand new geopolitical or weather-related event, I will be very surprised if we don’t pull back a bit from $100 in the next couple of days.

So, why were oil inventories down less than expected? Because refinery utilization continues to languish. You can see that in the utilization numbers, and you can see it in the fact that gasoline had an unexpected draw. Imports were also up from the previous week, surprising given the situation in Mexico. The other big surprise? Gasoline demand is still almost 1% above last year’s level. (Don’t overlook the role of ethanol there. As ethanol is added to the fuel supply, volume demand will go up even if miles driven don’t. I have documented that here).

Here were the highlights:

U.S. crude oil refinery inputs averaged 14.9 million barrels per day during the week ending November 2, down 43,000 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 nearly 8.9 million barrels per day. Distillate fuel production rose last week, averaging nearly 4.2 million barrels per day.

U.S. crude oil imports averaged nearly 9.7 million barrels per day last week, up 275,000 barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged 9.6 million barrels per day, or 461,000 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 1,131,000 barrels per day. Distillate fuel imports averaged 270,000 barrels per day last week.

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) fell by 0.8 million barrels compared to the previous week. At 311.9 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 decreased by 0.8 million barrels last week, and are at the lower end of the average range.

Both finished gasoline inventories and gasoline blending components fell last week. Distillate fuel inventories increased by 0.1 million barrels, and are at the upper limit of the average range for this time of year. Propane/propylene inventories decreased 0.4 million barrels last week. Total commercial petroleum inventories decreased by 0.9 million barrels last week, but are in the upper half of the average range for this time of year.

Total products supplied over the last four-week period has averaged nearly 20.7 million barrels per day, down by 0.4 percent compared to the similar period last year. Over the last four weeks, motor gasoline demand has averaged 9.3 million barrels per day, or 0.8 percent above the same period last year. Distillate fuel demand has averaged 4.2 million barrels per day over the last four weeks, down
2.4 percent compared to the same period last year. Jet fuel demand is down 1.2 percent over the last four weeks compared to the same four-week period last year.

$100 Edition? – to be updated following the release of the report

Note: The Oil Drum is down at the moment following an upgrade, but this will be posted there as soon as the technical problems are resolved.

It seems that every bit of news lately favors higher oil prices. In the wake of a perfect storm of weather-related and geopolitical events, Tapis went through the $100 mark overnight, and WTI is knocking at the door. In case you have been asleep for a week, the Fed cut interest rates, Mexico’s oil-rich Tabasco region is underwater, and oil companies are evacuating platforms in some parts of the North Sea ahead of a fierce storm predicted to generate 35-foot waves. The wind is howling in Aberdeen already, and did so throughout the night. (One of my engineers is stuck offshore and may have to ride out the storm, forecast for Thursday.)

Predictions are for a 1.6 million barrel draw for crude oil stocks this week. That expectation is factored into the price, so if we see less than that, crude could quickly give up some ground to profit-taking. However, the predictions for a draw may be too conservative, in which case WTI should quickly pop over $100. Gasoline inventories are forecast to rise by 200,000 barrels, and distillate inventories are expected to fall by 500,000 barrels.

Consider that the draws of the past 3 weeks have been much larger than predicted. I think the primary reason for that is a variable that analysts haven’t factored in: Some refiners are drawing down stocks and trying to wait out these prices. Consider it from their perspective, and it makes perfect sense. You have filled your tanks with oil at $80. You believe that we are in a speculative bubble. Therefore, you will risk drawing down inventories somewhat, and hoping that prices correct soon. If you fill your tanks at $100, and the price corrects back to $85, you are going to sell gasoline at a loss for a while. The risk in that strategy is obvious. But I do have direct knowledge that some are employing such a strategy.

So, there is that factor to consider with respect to the crude draw down. But the situation in Mexico, a large provider of U.S. imports, may cause the draw to be much steeper. This event has gotten very little attention in the media, but Mexican President Felipe Calderon said that the oil industry there has been devastated, and exports have ground to a halt. If it is as bad as it sounds, we should see a much larger draw than anticipated.

The final factor that may contribute to a larger than anticipated draw is the one that analysts have factored in: Refineries will be coming out of turnarounds. However, utilization rates have been lower than expected, primarily due to low margins. As I have mentioned before, if margins are poor, you aren’t exactly scrambling to process as many barrels as you can. So the utilization patterns of the past couple of years may not be a good guide for this year’s utilization pattern. Utilization should come up, which would lead to downward pressure on inventories, but it’s not a sure thing.

My prediction? While I have made it through 85% of the year, I think I will lose my $1,000 bet within 24 hours. However, I don’t expect oil to stay there for very long. I think it will return – probably to stay – in 2008, but I believe it has gotten ahead of itself at the moment.

There were two scenarios that I foresaw as potentially causing me to lose the bet. One, Saudi production could continue to decline, and I would surely lose it. That did not happen. In fact, indications are that Saudi is increasing production, although just how much spare capacity they have is debatable. Two, a series of unfortunate events, which I identified as “a bad hurricane season in the Gulf of Mexico, combined with terrorist attacks or pipeline problems (or any number of things)” could cause me to lose it. Well, we have had saber-rattling and finally sanctions with Iran, storms in Mexico, storms in the North Sea, a collapsing dollar, and growing demand combined with flat production. I think that qualifies as a series of unfortunate events. If that happens, I will have a post dedicated to the bet, including a bit of information about my mystery betting partner.

7 thoughts on “This Week in Petroleum 11-7-07”

  1. Robert,
    Maybe you should have bet that humans will continue to do the irrational things they always do: make wars, blow each other up, deny that peak oil is upon us, bet that “the market” will deliver us from our trespasses, … 🙂

  2. robert,

    off topic, but can you estimate — roughly — how much the Angolan government makes on every barrel of oil they produce ?


  3. The other big surprise? Gasoline demand is still almost 1% above last year’s level

    This is contrary to what I’ve been saying. Looking deeper I see some discrepancies in EIA’s data. Today’s report shows Finished Motor Gasoline was 9.266m bpd in 2006. But the actual year-ago report shows 2006 four week gasoline demand was 9.391m bpd, not 9.266m. That’s a 125k bpd difference, larger than the year/year change! If you use the number actually reported last year, FMG demand declined by 0.6%.

    There is a one day difference in reporting periods, the current year period ends on 11/2 vs. 11/3 last year. But one day out of 28 can’t cause a 125k bpd difference. If you look at prior weekly status reports the the 2006 numbers move around by +/-25k bpd. It’s only the last two reports which made big adjustments (-125k bpd) to 2006 numbers.

    They’ve changed the wording of footnote (4) since last year. It seems they changed the way they calculate FMG in such a way that you can’t use the historical tables to compare 2007 vs. 2006, as I was doing.

    I’d really like to hear Doug chime in on this one.

  4. For doggydogworld and others,

    When EIA releases our weekly data on Wednesday in the Weekly Petroleum Status Report, the demand data we show for the previous year is not the weekly data released a year earlier, but an estimate using the monthly data. For example, for the four weeks ending November 2, we take the 27 days of the October monthly average and 1 day of the November average (because it is actually supposed to be 7 am on Nov. 2, we don’t count Nov. 2 in doing this calculation), to come up with a 28 day average. Last year in October, the monthly data came in much lower than the weekly data was showing, which is the reason for the discrepancy you pointed out. While this comparison may sound illogical, it is an attempt to compare the most accurate data now (the weekly data) to the most accurate data last year (the monthly data).

    In This Week In Petroleum, we only use weekly data, so the comparisons are made using the most comparable weekly data from a year ago. This has the advantage of comparing apples to apples.

    I could make an argument for using either comparison. Perhaps the best thing to do is to use both, which in this case would leave you to beleive that demand is roughly flat compared to last year.

    Sorry it took me so long to respond, but I was rather busy yesterday.

    P.S. By the way, I always go by “doug macintyre” in this blog. Someone else comments using the name “doug” and that is not me. Just wanted to clear up any potential confusion.

  5. Doug, thanks for the response. I did not know about the monthly vs. weekly issue, and did not know the monthly data was considered more accurate (makes sense, though).

    Wonder why the weekly numbers were so far off last year? Anyway, I agree gasoline demand is probably flat vs. last year, and I expect the October monthly numbers to show as much when they’re released. Looks like I got a little overexuberant with my earlier claims of demand declines.

  6. Hi. I’m not an expert in the area of oil pricing, however I follow this blog avidly and with great interest. What are readers comments on the following article in todays WSJ?

    I’ve read papers from MIT Prof Edelman, presentations from Matthew Simmons, oil companies, and various other sources including The Oil Drum. To an outsider the information about future supplies seems to be from a pretty “noisy channel”. Are there known instances of disinformation from major sources that have been recognized? Is it an inherently difficult to gauge future oil supplies within an error bound?

  7. What are readers comments on the following article in todays WSJ?

    Some of it is accurate, but a lot of it is highly inaccurate. Some of it simply doesn’t matter. Maybe there are 1.7 trillion barrels of oil locked in Venezuela’s Orinoco tar sands. Does anyone think that it is coming to market soon, at bargain prices?

    The cost of production comments are highly inaccurate. That may have been true when oil was $20/bbl. But as oil becomes expensive, so do the extraction costs.

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