Update: My Limb Has Cracked
Two weeks ago, I went out on a limb and said that gasoline inventories would turn up within two weeks. Last week saw a pretty steep 2.8 million barrel draw. I stuck to my prediction for this week, and while the draw did drop to 1.1 million barrels (a month ago it was in the 5 million barrel range) it was a draw nonetheless. So, my limb broke. But there was a reason I included the section “Why I Might Be Wrong.” There is a lot of art involved in this forecasting, and many factors to consider. Otherwise, the analysts would always get it right, when in reality we have seen them miss badly on a regular basis.
I do think we are pretty close to the turning point, because the rate of the inventory draw has been dramatically slowing. However, the fact that we had an inventory draw this week continues the unprecedented situation we find ourselves in. On an absolute volume basis, in the past 20 years we have only had two readings in the spring that were lower than this. There were a couple of weeks in the first half of April 2001 that showed slightly lower gasoline inventories. But demand has increased substantially since then. On a days of supply basis, this week’s inventory number is the lowest we have ever seen in the spring, prior to peak summer driving season.
There are two primary reasons for this. One, is that refinery utilization is running a little behind normal. So, supply is down just a bit. But, demand is up. Higher demand + lower supply equals the situation we now find ourselves in. And while demand has been slowing, it is still running ahead of last year’s demand figures. That can only mean one thing: Higher gasoline prices until demand is brought back in line with available supplies.
Here were the highlights of the text report:
U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) rose by 1.1 million barrels compared to the previous week. At 335.6 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 fell by 1.1 million barrels last week, and remain well below the lower end of the average range. Distillate fuel inventories inched lower by 0.2 million barrels per day, and are just below the upper end of the average range for this time of year.
So, there’s the inventory situation. But, crude imports continue to run higher than normal:
U.S. crude oil imports averaged nearly 10.3 million barrels per day last week, up 229,000 barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged 10.0 million barrels per day, or 205,000 barrels per day more than averaged over the same four-week period last year.
And total products supplied were up, just not enough to meet demand:
Total products supplied over the last four-week period has averaged nearly 20.9 million barrels per day, or 3.3 percent above the same period last year. Over the last four weeks, motor gasoline demand has averaged nearly 9.3 million barrels per day, or 1.6 percent above the same period last year. Distillate fuel demand has averaged over 4.3 million barrels per day over the last four weeks, up 5.4 percent compared to the same period last year.
You can see Doug MacIntyre’s take on these numbers in This Week in Petroleum, which was published just a few moments ago. Not enough focus on the gasoline inventories, in my opinion, but a good discussion of benchmarks.
As the gravity of the gasoline inventory situation sinks into the public consciousness, more people than ever before will be closely watching this week’s inventory report. More and more stories are appearing in the media highlighting what I have been saying for a while now: Gasoline inventories are at unprecedented levels for this time of year. Two weeks ago I went out on a limb and said that inventories would turn upward within 2 weeks. While they did fall again last week, I am sticking to my prediction that they will turn back upward this week.
Why I am Right
A number of factors have combined to put us in the current inventory situation. Probably the most significant is that demand throughout the winter was at all-time highs. While we did build a nice inventory cushion going into spring turnaround season, it depleted much faster than was typical once turnaround season actually started. It was the rate of the inventory drawdown that has led me to speculate that prices would be headed much higher. And so far, the price data support this speculation.
However, I can see some trends starting to turn. As prices have spiked, gasoline demand has started to slow. Demand has fallen each week since the end of March, and is now 300,000 barrels a day lower than it was a month ago. While last week’s demand data is still running slightly ahead of the data from a year ago, that gap has closed. So demand is now more in line with where it was last year.
The second major factor putting us in the current position is that refinery utilization has been lower than normal (due to “ineptness” and “greed”, according to the clueless bunch at the FTCR; I wonder why no oil company has hired them as a consultant since they seem to know how to run a refinery). After climbing above the 90% utilization mark 2 weeks ago, a couple of refinery outages dropped that number back below 88% last week. Actually looking back to last year, we saw similar numbers, but then in May and into June utilization climbed back above 90%. We should see a similar pattern emerge this year, barring something unforeseen at one or two major refineries.
The third item to consider is imports. First quarter gasoline imports ran well behind last year’s numbers. That has helped put us in this situation. Starting in May of 2006, imports spiked up (eventually by half a million barrels a day) and eased the supply constraints. Looking back, however, last year’s import situation was an anomaly. Yet we are going to need this anomaly to repeat itself this year if supply and demand are to be brought into balance without prices having to go up another $0.50 a gallon. At current prices, though, I expect imports to start hitting the shores to take advantage.
I will note that it was last year’s April 28th report that showed a gain in gasoline inventories after they had fallen for seven straight weeks. Falling gasoline inventories at this time of year are typical because of turnaround season and the spring vapor pressure turnover. High demand has changed that picture this year and caused a steeper fall than normal. But this week I think we will see that gasoline stocks gain, reversing the trend just as they did during this week in 2006.
Why I Might Be Wrong
I think that demand for last week is likely to come in close to the level of a year ago (especially with the price spike following last week’s report), but the import and refinery utilization pictures are less clear. The import situation is further clouded by the threat of a refinery strike in Belgium. (Belgium, while a small country, does refine a large amount of oil). Refiners there may decide that they can’t afford to export gasoline to the U.S. with this hanging over their heads. Furthermore, a refinery in Oklahoma did go down last week as a result of a massive fire. While this is a very small refinery (50,000 bpd) every little bit counts when the market is as tight as it is.
I will note that according to a survey of analysts by Bloomberg:
U.S. gasoline stockpiles probably fell for a 12th week, as rising demand and breakdowns hampered refiners’ efforts to store fuel. Demand in the four weeks ended April 20 averaged 9.3 million barrels a day, 2.3 percent higher than a year earlier, the department said last week.
Gasoline supplies probably declined by 1.3 million barrels, based on the median estimate among the 13 analysts surveyed. Inventories dropped 2.79 million barrels to 194.2 million barrels the week before, leaving them 7.2 percent below the five-year average.
They do, however, forecast that crude inventories will continue to build:
Oil inventories in the U.S., the world’s biggest consumer, rose to a five-month high last week. An Energy Department report tomorrow will probably show the above-average oil inventories gained an extra 1.5 million barrels last week, according to a Bloomberg News survey of analysts.
Of course this is inversely related to their prediction of a gasoline inventory decline. When refinery utilization is high, they tend to draw down crude inventories and build gasoline inventories. So it would appear – reading between the lines – that the analysts believe that refinery utilization will come in low again this week.
Is This Evidence of Peak Oil?
In a word, no. I have seen a lot of people make this insinuation – that the draw down in gasoline inventories supports the contention that oil production worldwide has peaked. However, this is a real misreading of the situation. First of all, oil inventories are quite healthy, well above the average for this time of year. Crude oil imports are running slightly ahead of their values of a year ago. China also recently announced that they are currently importing record volumes of oil.
“OK”, you say, “But how do I know that crude quality hasn’t deteriorated and therefore gasoline yields are lower? How do I know that we aren’t simply outbidding other countries for crude?”
Well, on the quality issue, we have the data. Crude has heavied up a little since 2000. But refiners have been installing cokers and hydrocrackers, which will increase the demand for heavy oil. And in the past 4 years or so, crude gravity has been relatively constant. So it isn’t that refiners are suddenly having to deal with undesirable heavy crudes that are affecting their gasoline yields. You may read some sporadic accounts of this, but they are the exception. Looking at the sulfur situation, we see a similar picture. Sulfur content has been relatively constant for several years.
So, what about gasoline imports? If certain countries have peaked, perhaps they are using more of their gasoline internally. No. If we look back at the past several years, gasoline imports for this time of year are quite normal. In fact, if you look back a few years, with the exception of last year gasoline imports are running well ahead of the average over the past 5 years. So that explanation doesn’t add up either.
The gasoline inventory situation just doesn’t provide any peak oil evidence one way or the other. If we were looking at the identical situation with crude inventories – that is to say inventories below the 5-year average with crude prices spiking higher and higher – that would be much more indicative of support for peak oil. What we have right now is more of a refining/record demand issue.
The Price Debate
I have been warning of much higher prices for weeks. Doug MacIntyre, author of This Week in Petroleum, has dropped by several times and we have engaged in some debate about prices heading into summer. Doug’s contention was that prices are likely to moderate going into summer. As Doug had written:
…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…
As I responded:
I would say that it just depends on inventories. We are going into high-demand season in worse shape than we have been in for a while. Unless the trend reverses (gasoline stocks have declined for 10 weeks now) then I do expect prices to continue trending higher. Although on a week to week basis we might see no change or even a decline in prices, I think on a month to month basis falling inventories will continue to keep upward pressure on prices until the demand is brought back into balance with available supply.
To which Doug wrote back:
We agree a lot more than we disagree. Inventories need to improve soon. Also, we need to be relatively free of any major refinery problems this summer. But I agree that inventories are critical in shaping the price outlook for this summer.
Since then, there have been 2 price surveys. The first was almost flat, with prices declining by less than a cent per gallon. So, Doug gets a very slight nod on that one. But this past week, the average U.S. gasoline price was up by over a dime a gallon. That is a steep rise for a single week. So, I get the nod on that one, and for the 2-week period gasoline prices are up by 9 cents a gallon. And if inventories drop again this week, we are definitely headed for record prices this summer. At this stage, we may be headed there regardless of what inventories do over the next month.
I will update this at some point after the report is released tomorrow, but I will be tied up immediately after the release of the report. (For the next 3 days, I will be learning how to climb out of a helicopter underwater). It will probably be 2 or 3 hours after the release before I do the update.