Some Reactions to Gasoline Inventories
“Inventories are growing but we are still in big trouble with gasoline supplies,” said Phil Flynn, vice president of risk management at Alaron Trading Corp. in Chicago. “Supplies should be much higher going onto the Memorial Day weekend.”
U.S. gasoline consumption peaks during the summer driving season, which lasts from the Memorial Day holiday in late May to Labor Day in early September.
“We need to see 3-million-barrel builds,” said Peter Meyer, a commodity trader for Lehman Brothers Holdings Inc. in New York. “We need to see 95 percent refinery utilization in order to be comfortable about adequate gasoline supplies this summer. If we don’t see a 95 percent utilization rate, $4 gasoline is a sure thing.”
“There’s no evidence that high prices are reducing demand,” said Jason Schenker, an economist at Wachovia Corp. in Charlotte, North Carolina. “More product will definitely be supplied to the market because of increased refinery activity. It’s unclear that this will lead to higher inventories or just go to satiate strong demand.”
Regarding the comment from Peter Meyer, the highest the utilization rate has been since Hurricane Katrina is 93.8%. I don’t think it’s likely that you will see 95% any time soon.
Update Following Text Report
The data have been released. There was a decent build of gasoline, but not nearly enough to avoid a record low for Memorial Day weekend next week. The required build over 2 weeks is 5.5 million barrels of gasoline, and the actual build this week was 1.5 million barrels. So, I think my prediction of a record low next week is pretty safe still. Gasoline imports were still strong, but surprisingly down from last week. The big story was refinery utilization, which climbed to 91.1 percent. I would also note that despite these prices, demand continues to run 1.2 percent ahead of last year’s level.
Refineries operated at 91.1 percent of their operable capacity last week. U.S. crude oil imports averaged nearly 10.9 million barrels per day last week, up 560,000 barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged over 10.6 million barrels per day, or 563,000 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 1.3 million barrels per day.
U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) rose by 2.0 million barrels compared to the previous week. At 344.2 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 climbed by 1.5 million barrels last week, but remain well below the lower end of the average range. Distillate fuel inventories increased by 0.5 million barrels per day, and are just below the upper end of the average range for this time of year.
Total products supplied over the last four-week period has averaged 20.8 million barrels per day, or 2.2 percent above the same period last year. Over the last four weeks, motor gasoline demand has averaged nearly 9.4 million barrels per day, or 1.2 percent above the same period last year.
Imports to the Rescue?
On March 9th, I published an essay entitled Why Are Gas Prices Rising? There are two specific things I wrote then that I want to call attention to:
There are valid reasons that gas prices are rising, and people should take time to educate themselves on this very important issue that affects all of our lives. As I have said again and again, look to the product inventories – which are published on a weekly basis by the Energy Information Administration (EIA) – to guide you on what prices will do in the short term.
Inventories at that time, two and a half months ago, had started to drop rapidly. Prices started to rise, but the drop continued. You can trace the roots of the current situation back to last winter, when low prices spurred record demand. However, lower prices also tend to suppress imports, the other factor I mentioned on March 9th:
Gasoline demand was unusually high throughout the winter. This could pose problems in the coming weeks, as it has resulted in gasoline inventories being pulled down. The U.S. relies on gasoline imports to satisfy part of the demand, but when the price falls it becomes less profitable for those exporting the gasoline.
I don’t know for certain, but I would guess that it takes a minimum of 2 weeks for producers in Europe to respond to price signals in the U.S. Maybe 3 weeks at most to get the tanker loaded, sent across the Atlantic, and unloaded on the East Coast. Imports from SE Asia obviously take a bit longer to reach California. But if I look back 3 weeks, I see that prices even then had run up since the end of January by just over $0.80/gallon. Since then, they have run up an additional $0.24/gallon, for a total run up of over $1.00 a gallon. In fact, at this point we have now set an all time record for gasoline prices, even on an inflation-adjusted basis. However, if you are a student of TWIP, you might have had an inclination that this was coming, given the incredibly steep pull down in gasoline inventories in the past 3 months.
Gasoline Prices are in Record Territory
While refiners are certainly making good profits from the recent rise, another result is that foreign refiners will want to get a piece of the action. As I commented a few weeks back, I can hear them scrambling to fill tankers to get the product to the U.S. Imports last week had increased by 700,000 barrels per day over the low point in February. I expect that trend to continue, and imports to start taking some of the pressure off of gasoline prices pretty soon.
We are feeling those effects in Europe, as gasoline prices are on the rise here. Given that oil prices are lower than they were a year ago, I think this is a pretty good indication that some supplies are being sent to the U.S. market, tightening up supplies here and driving up the prices. So, a lot of the rest of the world is feeling a ripple effect from the supply situation in the U.S.
However, I do still think things will be very tight until at least mid-June, and that we will still go into Memorial Day with record low inventories. I don’t expect there to be wide-spread outages unless there is an emergency, and I think these high prices will start to relieve the inventory crunch by attracting imports. I think we will see a healthy build of gasoline stocks this week – but less than the 2.75 million barrels that would be needed over the next two weeks to stay out of a record low inventory situation. If we don’t have a build this week, or have a small build (say less than a million barrels), then I repeat what I wrote last week: “It is really hard to imagine where gasoline prices could top out given current inventory levels.”