This Week in Petroleum 9-06-07

Another week, another all-time low on gasoline inventories. As I wrote last week:

Gasoline inventories were not this low following Hurricane Katrina, and yet we have had an uneventful summer. It is very possible that we will not dig ourselves out of this hole for a long time. In the short term, an upturn in gasoline prices is inevitable.

I have been closely watching OPIS reports this week, and gas prices have ticked up most days. I don’t have the numbers in front of me, but I think gas is at least a dime higher than it was a week ago. (It occurs to me that if I would ever act on my predictions and buy some futures, I could make a little money).

This week’s inventory report saw another gasoline draw:

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) fell by 3.9 million barrels compared to the previous week. However, at 329.7 million barrels, U.S. crude oil inventories remain above the upper end of the average range for this time of year. Total motor gasoline inventories dropped by 1.5 million barrels last week, and are well below the lower end of the average range.

“Well below” may be an understatement. Looking at my records, there haven’t been too many weeks on record where gasoline inventories have been lower on an absolute basis (and never on a days of supply basis). In fact, the last time gasoline inventories were this low was the week after Hurricane Katrina. Incidentally, this week’s gasoline inventory is 191.1 million barrels. The lowest number on record was on August 29, 1997 at 185.6 million barrels.

The next few weeks will be interesting. We are at the end of peak driving season, but we will soon be heading into fall turnaround season where gasoline production will drop. Winter gasoline is also right around the corner. This time of year typically sees gasoline prices fall (prompting conspiracy calls when it also happens to be an election year) but with inventories where they are we probably won’t see that typical price drop. In my opinion, we can’t afford to see it. Last fall prices fell, and demand picked up. We can’t afford for demand to pick up with inventories setting where they are.

I predict that prices will continue to rise. I think they have to. I also think we will see the ramifications of present inventory levels for quite some time. On the other hand, we did go into the end of 2003 with inventories in this range, so we do have some history suggesting that levels can recover without requiring sharply higher prices. But don’t bet on it.

Update: Conoco Sweeny, Texas Refinery To Shut Gasoline Unit

NEW YORK -(Dow Jones)- ConocoPhillips (COP) plans to shut a key gasoline production unit at its Sweeny refinery in Texas on Thursday to make emergency repairs, according to a filing with state environmental regulators.

A plug valve in the reactor associated with the fluid catalytic cracker is the source of the problem, said the report to the Texas Commission on Environmental Quality. The shutdown, said to begin at 11 a.m. CDT Thursday, is seen lasting about 36 hours. The report didn’t indicate how long repairs might take or when the unit would return to normal operations.

The Sweeny refinery is able to process about 247,000 barrels of crude oil a day.

That’s not going to help matters any.

7 thoughts on “This Week in Petroleum 9-06-07”

  1. As you probably know, inventory levels are a favorite theme of our friends at Oil They charge that industry collusion to reduce inventories is driving gasoline prices up.

    I and a few others have posted there a number of times, acting as a sort of a virtual pooper scooper to dispose of Watchdog’s messes. But the messes keep coming.

    What is your spin on their allegations? How would you counter their collusion claims with respect to inventory levels?

    I have no doubt that we’ll see a fresh sabre-rattling post from the Watchdog any day now on these low inventory levels.

  2. I am going to break discipline here and comment, because I have read so many of your comments over at Oil Watchdog. I have even posted some of them over here. Not bad for someone who is a “suspected shill for BigOil.” LOL! You have to ask if these people are for real. If I wanted to pretend to be a bumbling, clueless oil critic, I couldn’t do a much better job than they are doing.

    As far as intentionally keeping inventories down, if a person knows the first thing about the oil industry they know how stupid that is. How would you keep gasoline inventories down? You would have to keep production low. Which oil company is willing to keep production artificially low with such good margins? This isn’t OPEC, even though they seem to think so. Shell doesn’t call up Exxon to ask what they are doing with production and prices. In Judy Dugan’s fantasyworld, this is how things work. But not in the real world.

    In the real world, let’s say BP wanted to cut production to boost prices. How do they know that Shell won’t pick up the slack? How do they know that importers won’t? And in fact, BP would have given up a huge chunk of revenue to boost prices for everyone. Their CEO’s head would be on a plate.

    OK, back to lurking. But thanks for stopping by. I have enjoyed your work at Oil Watchdog. Keep ’em back on their heels.

  3. Right. I don’t think Watchdog grasps the notion of competition. In fact, it struggles with most economic concepts. I seriously doubt that Research Director Judy Dugan even knows how to run Excel! 🙂

    Unfortunately, I’d guess that the majority of the public agrees with Dugan on most points, although they probably have slightly less foam emanating from their lips.

    Thanks for your comments, I’ll continue to be the thorn in Watchdog’s paw. It’s good therapy!

  4. I wonder if EIA’s seasonal adjustment factors are getting out of whack…some weeks hop around like a jackrabbit with a hotfoot..I also wonder if station owners (about 200,000 in USA) read the same news we do, and are “tanking up” more often as a result. I would.
    In that case, we might have plenty of gasoline.
    The reason I wonder is that there are scant reports about anyplace actually running out…jeez, the doomsters grasp onto a single station closed down outside St. Louis at the start of summer…nothing since.
    Last thouht: More industries are running on lower inventories…gasoline any different?

  5. What is the motivation to keep the inventories high?

    Commodity buyers might want to keep higher inventories if they believe that a) prices will rise sharply in the future or b) there is a risk for supply disruption

    Inventories will naturally rise if prices (particularly spot prices) have risen dramatically – producers will want to sell as much as they can at this high price. The same thing can happen if forward or futures prices drop relative to spot prices.

  6. A look at the refinery utilization rates shows that production is not being artificially reduced.

    Inventory question – as more ethanol is used in the final product, and since it can only be added to the gasoline late in the process, wouldn’t you need to add ethanol inventories to gasoline inventories (with appropriate mpg reductions factored) to get an apples to apples comparison?

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