This Week in Petroleum 5-23-07

Some Reactions to Gasoline Inventories

From Bloomberg:

Crude Oil Is Steady as U.S. Gasoline Supplies, Demand Increase

“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.

EIA Inventory Report Highlights

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.”

9 thoughts on “This Week in Petroleum 5-23-07”

  1. On CNBC this morning they reported that refiners and importers have more gas than the Colonial pipeline can transport. If the Colonial is going to run at max would that end up solving the shortage before long? (NYMEX delivery is NY harbor) Does this have anything to do with anything? Or just market dis-information?

  2. Does this have anything to do with anything? Or just market dis-information?

    I wouldn’t be surprised if that pipeline is generally full all the time. At my former refinery in Montana, the product pipelines out of there were often full. That tends to happen most when you see good margins in a particular market, and you want to get your product there. Producers are always allocated space. But without knowing the particulars of Colonial, I don’t know if it is significant or not.

    Cheers, RR

  3. Nice analysis, Robert.

    Imports to the rescue?

    From the chatter on the newswires it sounds like it, but we may find ourselves asking this question throughout the summer.

    The chart you’ve posted shows that after the sharp run up in April & May last year, gas prices pretty much stayed on a plateau before a final peak in August. However gasoline imports, which surged in May 2006 and set several weekly records, slipped back down again in mid-June, and this in turn contributed to the usual drawdown in stocks.

    This year with the initial driving season stocks so low I wonder whether we’re going to need those high imports to persist right through the summer, and if that’s the case then quite likely we’ll be seeing record prices across Europe and elsewhere.

    You’re absolutely right – this is an issue that is reaching beyond the shores of the U.S.

  4. I asked about this last week. The Houston area has some of the lowest gasoline prices in the country right now, with reformulated gasoline selling at a 7 cts/gallon discount to conventional. It appears that there is excess supply in Houston. Both the Colonial pipeline (Houston to Linden, NJ) and Explorer (Lake Charles to Houston to Chicago area) are filled up attempting to redirect supply to where it is most needed.

    PADD II (midwest states) are short because of a refinery fire on February 16 at Valero’s refinery in McKee, TX (panhandle).

    Moving the supply around won’t help the nation overall, but should reduce prices for some. Although we will pay more here in Houston.

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  6. So, why were imports down? Shouldn´t record prices in the US be attracting more? And I´m surprised that the news stories Í´ve seen so far haven´t really mentioned it much.

  7. If the folks at the FTCR want to do something constructive, they will get behind and suppor the refinery expansions.

    The FTCR has a multiple personality disorder. They complain about oil companies, regardless of what they are doing. For instance, they like to complain about those dirty, stinking, filthy, polluting refineries, and then complain that they haven’t been expanded. Someone needs to up their meds.

    Cheers, RR

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