This Week in Petroleum 4-11-07

Update:

Gasoline Inventories Are Plummeting

This week’s report highlights:

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 0.7 million barrels compared to the previous week. At 333.4 million barrels, U.S. crude oil inventories are just above the upper end of the average range for this time of year. Total motor gasoline inventories fell by 5.5 million barrels last week, and are just below the lower end of the average range. Distillate fuel inventories inched higher by 0.1 million barrels, and are slightly above the upper end of the average range for this time of year.

U.S. crude oil imports averaged 9.8 million barrels per day last week, down 441,000 barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged over 10.0 million barrels per day, or 202,000 barrels per day more 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 953,000 barrels per day. Distillate fuel imports averaged 259,000 barrels per day last week.

That’s another unexpectedly large draw on gasoline stocks, and the second week in a row that the estimate was badly missed by the analysts. Expect gasoline prices to continue rising. However, I would expect this plunging inventory situation to reverse within 1 to 2 weeks.

What’s Driving Prices?

If you follow the petroleum markets, or you just want to know what is going on in the world of energy, the weekly report from the Energy Information Administration (EIA) is invaluable. Every Wednesday the EIA releases a report detailing information on petroleum and product inventory levels, imports, prices, refinery utilization, etc. For those who follow this information, the recent run-up in prices is not a surprise, as you would have seen it coming. It is not driven – as some have insisted – by a renewed willingness on the part of oil companies to gouge consumers. (It is still hard for me to believe that intelligent people can believe things like that). No, the graph of gasoline stocks shows why gas prices have risen.

Note the gasoline inventory trend over the past year. If I plotted price on top of that, you would see a very strong inverse correlation between price and inventory level. If inventories are falling fast, as they have been recently, price will rise fast. And price will continue to rise as long as inventory levels are plunging. “Supply and demand” is not just a cliché. It is a predictor of trends. And while gasoline inventories are not yet in terrible shape, if they fall for another week or two they will be in danger of dropping below the normal range – just as we head into high-demand season. Also, while inventories do tend to fall at this time of year, the steepness of the plunge this year is unusual, and is the primary driver in the recent rise in gasoline prices.

Inventory Levels

The next obvious question then is, “Why are inventory levels falling?” As you saw in my previous essay, the FTCR, an organization who thinks $2.00/gallon gasoline is a consumer right (!), asserts that refiners are purposely keeping inventory levels low by withholding capacity. They have put out 2 news releases in the last couple of days making that accusation, which included (both times) the illogical leap that lower capacity = deliberate restriction.

However, as I pointed out in the previous essay, not only is overall refining capacity up on the West Coast, it is up across the U.S. The problem is that demand is increasing so fast that excess capacity has been eroded. Ten years ago, if a refinery went offline for maintenance, there was enough spare capacity that there was no real impact on the market. That is no longer the case. So, that leaves 2 options for addressing the increasing demand: Higher prices or rationing. Which do you prefer?

This Week in Petroleum

The links you want to bookmark, if you really want to be more informed about what’s happening in the world of energy, are:

Text File of Highlights

This is the first report to come out. It is released at 10:30 a.m. EST each Wednesday. This is a text file that provides all of the important details, although without the graphics. But it is a link that I typically click into within 5 minutes of the release of the report each week.

The second link that I read every Wednesday is:

This Week in Petroleum:

This is a comprehensive and graphical look at the trends and developments. I pulled the graph above from this week’s report. The report is released at 1 p.m. EST (and the author of that report has dropped by this blog and commented before).

This Week’s Predictions

Often you can find the analyst’s predictions of what the report will contain. Sometimes they will miss badly, as they did last week. Here is what they are predicting for this week:

Analysts surveyed by Dow Jones Newswires expect gasoline inventories to have dropped by an average of 1.3 million barrels last week from the previous week. Analysts are also calling for a 900,000 barrel decline in distillate stockpiles — which include diesel fuel and heating oil — and a build of 1.6 million barrels in crude oil supplies.

I will update this when the report is released. It was at this point last year that refineries began to come out of their turnarounds and gasoline finally reversed the declines. I expect that to happen within the next couple of weeks. Imports will also be key. Gasoline imports have been high as prices have risen, and as long as they continue to arrive it will take some pressure off of prices.

15 thoughts on “This Week in Petroleum 4-11-07”

  1. So, what do you think gas prices will do this year? If I’m interpreting the Products Supplied tables correctly (EIA), we seem to be starting the year off with fairly high demand for petroleum and gasoline. Higher than last year anyway.

    And based on the gasoline prices tables, we’re also averaging higher prices than last year. So, my layman guess would be that if demand stays strong, we’re going to see prices go higher than last year, all else being equal. But I think I’ve seen news reports that say gas prices this year will be lower than last year. Any thoughts?

  2. So, what do you think gas prices will do this year? If I’m interpreting the Products Supplied tables correctly (EIA), we seem to be starting the year off with fairly high demand for petroleum and gasoline. Higher than last year anyway.

    We have higher demand combined with currently lower output. We are entering high demand season in much worse shape than last year. Unless things turn pretty quickly, we will see record gasoline prices this summer. Inventories can’t continue to plummet like this, and if the refineries don’t hurry up and pick up the pace (or more inventories start hitting the shores), price is the only handle left.

    The next two weeks will be very interesting. I was really surprised at the magnitude of this week’s draw. But I do expect to see the trend reverse within 2 weeks. If not, then we will set price records for gasoline across the U.S.

    Cheers, Robert

  3. Robert – what is your opinion of COP’s announcement today on climate change?

    I was quite pleased, and plan on writing something up. I just hope the FTCR doesn’t get a hold of it. I am sure they will find a way to spin it into bad news.

    Cheers, Robert

  4. Price of one gallon of petrol in UK is only!(0.90p liter) $6.70. I wuld like to know what americans will do when oil will go up to that price
    $6.70 for GALLON

  5. Can’t wait to see your comments. As an engineer and scientist (I am about a decade ahead of you and did basic research on F-T synthesis and ethanol at a major land grant university) I remain skeptical about man’s influence on GW. But I agree with sensible steps that promote conservation and reduction in greenhouse gases without wrecking economies.

    The political reality is something entirely different. With the Supreme Court declaring CO2 a pollutant, sooner or later we are going to get some kind of regulation on it.

    We are already reworking project economics with the new internal “carbon tax”. It is driving some technology decision.

  6. Robert, I always find your well-reasoned articles about energy very interesting. Because I live in the San Francisco bay area and saw the rapid increase in gas prices recently I found your explanations of inventories very interesting. It makes a lot more sense than the hysteria that’s been floating around. In my local paper I found the following article about the recent gas price increases: http://www.insidebayarea.com/search/ci_5570527
    It starts off well and seemed fairly reasoned. They mention most of the common reasons why we pay more in California. But they also mention increases in profit margins at the refiners without talking at all about the increased demand. They also spend too much time quoting the FTCR (your favorite group). I guess that’s what they have to do to say they’re “balanced”.

  7. They mention most of the common reasons why we pay more in California. But they also mention increases in profit margins at the refiners without talking at all about the increased demand.

    To be fair, profit margins have gone up as prices have gone up. But the FTCR has it exactly backwards. It isn’t profit margins driving prices higher. It is high prices, as a result of supply/demand issues, that lead to the high margins. If refiners could just jack up margins at will, then they wouldn’t go up and down like they do.

    Cheers, Robert

  8. In my local paper I found the following article about the recent gas price increases:

    That’s a pretty decent article if you can get past Jamie Court’s (of the FTCR) hysterics. Here is the link in clickable format:

    STRETCHED TO THE LIMIT

    They do largely miss the point that it isn’t extra profits causing higher gas prices, but rather extra profits result from higher gas prices. They have their cause and effect mixed up.

    Cheers, and thanks for that link.

    Robert

  9. “Price of one gallon of petrol in UK is only!(0.90p liter) $6.70. I wuld like to know what americans will do when oil will go up to that price”

    Us horrible Prius drivers will laugh, but that’s our evil selves.

  10. Robert, from the IEA today:

    “Total OECD inventories fell by 80.5 mb in February on declining product stocks in all regions and a crude draw in the Pacific. Forward cover is declining counter-seasonally and preliminary March data for the US, Japan and Europe indicate an unusual 1Q stock draw of around 1.0 mb/d.”

    How do you read that relative to current and future prices? What about the counter-seasonal drawdown?

  11. How do you read that relative to current and future prices? What about the counter-seasonal drawdown?

    We have been talking all winter about how unusually high demand has been. You typically don’t see stocks being pulled down so hard until later on. I don’t think it bodes well for prices later on this summer.

    But, this is typically the week that the draw down changes direction. If we don’t see a build over the next couple of weeks, then that will spell a lot more trouble.

    Cheers, Robert

  12. Robert, about a month ago I asked what would convince you that a global peak was imminent. You nominated sharply declining inventories as one of the criteria. We have that now, and so far OPEC has not responded with increased production.

    What is the next warning sign I should look out for?

  13. You nominated sharply declining inventories as one of the criteria. We have that now, and so far OPEC has not responded with increased production.

    The problem is that the sharply declining inventories in the U.S. have been on the product side. More oil production won’t help that. However, as we come out of spring maintenance season, I expect that we will start to pull our crude inventories down. That’s when I expect to see OPEC bump up production.

    Crude inventories have been pulled down across the OECD, though, so even if we don’t start pulling our inventories down in the U.S. I think that OPEC has to bump up production by summer. If they can’t, then the next sign you need to look for is new record high oil prices that will be required to destroy demand.

    Cheers, Robert

  14. Robert,

    Doug MacIntyre, the primary author of This Week In Petroleum (TWIP), stopping by again! Thanks for linking to us and pointing us out as a useful resource. We certainly try to provide taxpayers their money’s worth.

    Given that I’m writing this on April 19, I’m sure you have read our latest TWIP, where we show how recent history has indicated that we are not guaranteed of seeing higher prices on Memorial Day or around July 4, than we see in mid-April. I think retail prices will be heading down soon, possibly as early as our next price survey on Monday (see http://tonto.eia.doe.gov/oog/info/gdu/gasdiesel.asp after 4:30 pm ET on Mondays), even with gasoline inventories continuing to decline. But gasoline production is up, refineries are coming back, and hopefully, gasoline imports will rise, all adding to supply and hopefully, reversing the inventory trend. Some of the inventory decline recently may be a dumping of winter-grade gasoline to make storage room for summer-grade. The big questions are how much (or little) will retail prices fall, and will they rise even higher later this summer? I believe these are still tough questions to answer at this point, but I would expect to see retail prices starting to come down, if not this coming Monday (Apr. 23), then perhaps by Apr. 30.

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