Halloween Edition – Updated following the release of the report
Overall inventories decreased, and there was a fairly large crude draw, which is likely to push oil prices up from here. If the Fed cuts rates by 0.5%, then I would say we have a decent chance of $100 within the week. No rate cut, and prices probably fall back.
U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) fell by 3.9 million barrels compared to the previous week. At 312.7 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 increased by 1.3 million barrels last week, and are in the lower half of the average range. Both finished gasoline inventories and gasoline blending components rose last week. Distillate fuel inventories increased by 0.8 million barrels, and are at the upper limit of the average range for this time of year. Propane/propylene inventories increased 0.9 million barrels last week. Total commercial petroleum inventories decreased by 1.1 million barrels last week, but are in the upper half of the average range for this time of year.
Crude imports were up over last week (which isn’t saying much, as last week’s imports were very low). Gasoline imports were very healthy for this time of year, which is surprising to me because of the weak dollar, and the current level of crack spreads:
U.S. crude oil imports averaged nearly 9.4 million barrels per day last week, up 278,000 barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged nearly 9.7 million barrels per day, or 481,000 barrels per day less 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 1,238,000 barrels per day. Distillate fuel imports averaged 325,000 barrels per day last week.
Refinery utilization slid again this week. Refineries should be coming out of turnarounds at this point, but low crack spreads are a disincentive for refiners to work around the clock and spend extra money to expedite returning to full capacity. Also, as the crack spreads decline, there are marginal barrels that you will simply be unwilling to purchase, as they will essentially take your marginal crack to zero. Refiners have models that predict things like this, and I have seen lots of cases in which barrels were available, but refiners chose to run at less than capacity rather than earn nothing on the additional barrels they would have to purchase to come up to full capacity. And I have first hand knowledge that this is indeed the case at some specific refineries.
U.S. crude oil refinery inputs averaged 14.9 million barrels per day during the week ending October 26, down 13,000 barrels per day from the previous week’s average. Refineries operated at 86.2 percent of their operable capacity last week. Gasoline production fell compared to the previous week, averaging 8.9 million barrels per day. Distillate fuel production rose last week, averaging 4.1 million barrels per day.
Note also the seasonal shift toward distillates.
Finally, I continue to see conflicting reports on whether gasoline demand is up or down:
Total products supplied over the last four-week period has averaged 20.7 million barrels per day, down by 0.1 percent compared to the similar period last year. Over the last four weeks, motor gasoline demand has averaged nearly 9.3 million barrels per day, or 0.3 percent above the same period last year.
At this point, I think the Fed will make the final determination on whether we reach $100 within the next week.
Halloween Edition – to be updated following the release of the report
Yogi Berra once famously noted “It’s tough to make predictions, especially about the future.”
I will add a corollary to that, albeit without Yogi’s succinctness: As a future event becomes more probable, the number of people who knew it all along will grow exponentially. I mean, let’s face it. Wasn’t if obvious that Boston would win the World Series? Likewise, wasn’t it obvious that crude prices would be knocking on the door of $100 as November approached?
I want to review, because I see a widespread affliction of amnesia following this recent 30% run-up. Flashback to August. Oil prices were poised to go on a run that would take them to over $90 in October. What were people saying then? It was in August that legendary oil man T. Boone Pickens told CNBC; “I think you’re going to see $80 a barrel before I’m 80.” His 80th birthday is in May 2008. CIBC World Markets said that crude prices could reach $80 a barrel this year and $100 by the end of 2008. Deutsche Bank raised its “long-term” oil price forecast to $60 a barrel. And the EIA wrote in their August Short Term Energy Outlook: “Crude oil prices, which have been rising over the last 2 months, are expected to reach a peak monthly average price in August before starting to ease slightly.”
That was conventional wisdom. Some were calling for lower oil prices, and those calling for higher oil prices certainly were not calling for $100 oil in 2007. That was what the talking heads and the analysts were saying in August. One notable exception was Goldman Sachs, who wrote that US crude price could top $90 a barrel in the fall and hit $95 by the end of the year if OPEC didn’t bump production. They nailed it. But their opinion was definitely not held by the majority as if it was obvious all along.
On the topic of Goldman Sachs, I have seen some suggest that they are trying to influence oil prices by telling clients to take profits. Of course one wonders if the same people were making those claims when oil was $70 and Goldman was calling for it to run to $90. I guess if you are long at $93, Goldman says take profits, and you start to lose money, it’s not that you misjudged. No, it’s market-manipulation. But that works both ways. And the U.S. Commodity Futures Trading Commission has noted that the long to short ratio has grown rapidly throughout this rise. That in and of itself will help fuel the climb. But this Goldman Sachs issue is a good example of why I don’t trade short-term. The fundamentals in the short-term can be wiped out by market sentiment. And things like their sell recommendation can swiftly change market sentiment.
Anticipating Today’s Inventory Report
As I wrote after the release of last week’s report, “this inventory report will provide a lot of fuel for the bulls for another week.” A lot of fuel indeed, as oil ran up by about 10% in the past week, before correcting back yesterday. So, do we get tricks or treats today? Of course one man’s trick is another man’s treat. And this week’s inventory report will have lots of implications, as did last week’s.
If we see a big draw, I think we see another run at $100. A big build, and the profit-taking continues. However, complicating today’s report is the decision by the Fed whether to cut interest rates. If the Fed cuts rates by half a percent, and we see a big draw, I think we see $100 oil within a week. If the cut is a quarter point or no cut at all, I think we continue to see profit-taking unless there is a very big crude draw. No cut and a big build should cause prices to fall quickly. Of all the scenarios, I think the case for a sprint toward $100 is the weakest. My own thoughts are that we see a build* and a quarter point cut or less, and that oil prices slowly drift down in the short-term.
Personally, I wouldn’t cut rates at all after the battering the dollar took the last time rates were cut. But they didn’t ask my opinion. Nor, as far as I can tell, did the Fed read my blog to find out my opinion. But as I noted yesterday, someone at Goldman Sachs did. So I take full responsibility for manipulating the worldwide price of oil downward to avoid losing my $1,000 bet. 🙂
*Note 1: If I was running a refinery, I would probably prefer to pull down inventories with crude at these prices. You have probably seen the comments from major oil company executives who don’t feel that the current price is sustainable short-term. If you believe a correction is coming, you may prefer to draw down inventories somewhat and take your chances. But as I have noted previously, that can be a Catch-22. Keep your inventories full at these prices, and you are supporting the current price levels. Pull them down in the current atmosphere, and you support the impression that supply is insufficient, which will favor higher prices.
Note 2: I won’t be responding to comments on this essay, as I have pumpkins to carve and kids to take Trick-or-Treating.
Halloween Edition – to be updated following the release of the report
Yogi Berra once famously noted “It’s tough to make predictions, especially about the future.”
I will add a corollary to that, albeit without Yogi’s succinctness: As a future event becomes more probable, the number of people who knew it all along will grow exponentially. I mean, let’s face it. Wasn’t if obvious that Boston would win the World Series? Likewise, wasn’t it obvious that crude prices would be knocking on the door of $100 as November approached?
I want to review, because I see a widespread affliction of amnesia following this recent 30% run-up. Flashback to August. Oil prices were poised to go on a run that would take them to over $90 in October. What were people saying then? It was in August that legendary oil man T. Boone Pickens told CNBC; “I think you’re going to see $80 a barrel before I’m 80.” His 80th birthday is in May 2008. CIBC World Markets said that crude prices could reach $80 a barrel this year and $100 by the end of 2008. Deutsche Bank raised its “long-term” oil price forecast to $60 a barrel. And the EIA wrote in their August Short Term Energy Outlook: “Crude oil prices, which have been rising over the last 2 months, are expected to reach a peak monthly average price in August before starting to ease slightly.”
That was conventional wisdom. Some were calling for lower oil prices, and those calling for higher oil prices certainly were not calling for $100 oil in 2007. That was what the talking heads and the analysts were saying in August. One notable exception was Goldman Sachs, who wrote that US crude price could top $90 a barrel in the fall and hit $95 by the end of the year if OPEC didn’t bump production. They nailed it. But their opinion was definitely not held by the majority as if it was obvious all along.
On the topic of Goldman Sachs, I have seen some suggest that they are trying to influence oil prices by telling clients to take profits. Of course one wonders if the same people were making those claims when oil was $70 and Goldman was calling for it to run to $90. I guess if you are long at $93, Goldman says take profits, and you start to lose money, it’s not that you misjudged. No, it’s market-manipulation. But that works both ways. And the U.S. Commodity Futures Trading Commission has noted that long interest has grown rapidly throughout this rise. That in and of itself will help fuel the climb, and if those positions start to liquidate that will fuel a drop.
Anticipating Today’s Inventory Report
As I wrote after the release of last week’s report, “this inventory report will provide a lot of fuel for the bulls for another week.” A lot of fuel indeed, as oil ran up by about 10% in the past week, before correcting back yesterday. So, do we get tricks or treats today? Of course one man’s trick is another man’s treat. And this week’s inventory report will have lots of implications, as did last week’s.
If we see a big draw, I think we see another run at $100. A big build, and the profit-taking continues. However, complicating today’s report is the decision by the Fed whether to cut interest rates. If the Fed cuts rates by half a percent, and we see a big draw, I think we see $100 oil within a week. If the cut is a quarter point or no cut at all, I think we continue to see profit-taking unless there is a very big crude draw. No cut and a big build should cause prices to fall quickly. Of all the scenarios, I think the case for a sprint toward $100 is the weakest. My own thoughts are that we see a build* and a quarter point cut or less, and that oil prices slowly drift down in the short-term.
Personally, I wouldn’t cut rates at all after the battering the dollar took the last time rates were cut. But they didn’t ask my opinion. Nor, as far as I can tell, did the Fed read my blog to find out my opinion. But as I noted yesterday, someone at Goldman Sachs did. So I take full responsibility for manipulating the worldwide price of oil downward to avoid losing my $1,000 bet. 🙂
*Note 1: If I was running a refinery, I would probably prefer to pull down inventories with crude at these prices. You have probably seen the comments from major oil company executives who don’t feel that the current price is sustainable short-term. If you believe a correction is coming, you may prefer to draw down inventories somewhat and take your chances. But as I have noted previously, that can be a Catch-22. Keep your inventories full at these prices, and you are supporting the current price levels. Pull them down in the current atmosphere, and you support the impression that supply is insufficient, which will favor higher prices.
Note 2: I won’t be responding to comments on this essay, as I have pumpkins to carve and kids to take Trick-or-Treating.
Does this story have any credibility? What do you think about it, Robert?
Oops, forot the link!
Here it is!!!
http://money.cnn.com/2007/10/30/magazines/fortune/Oil_from_stone.fortune/index.htm
Technical feasibility was established 100 years ago. Commercial feasibility has never been demonstrated, as the energy inputs into the process are too high. I expect to see CTL long before we see oil shale contribute to our energy needs. Oil shale is essentially “unfinished” oil, and you have to add energy to finish it.
I also worked on this in the 1980s. Technically it works, but economics is the problem. With oil selling at $90 ($15 per million BTUs) and Wyoming gas at $3 (per million BTUs), you might make a go of it. Basically you are turning your cheap gas into a liquid fuel. Rockies gas is primarily locked into the California market, and CA border price sells at a discount to Henry Hub, Louisiana prices. Once Rockies Express pipeline is up and running, now Colorado and Wyoming gas can make it to markets on the east coast. Wyoming gas prices should go up. Then schemes like this won’t be so good.
Since Goldman Sachs and Lehman Bros. read this blog – Robert brings up a good point. If crude inventories fall how do we know the cause? Could it be as I suspect, buyers dropping out because prices are too high and they skim by on inventory. OR, is demand up and producers can’t keep up? Changes in inventory alone don’t tell you anything.
Another thing we haven’t talked about is crude selection. As prices rise, refiners may run more heavy, sour crudes which sell at a discount. It is like walking into the supermarket to pick up a T-bone steak. You see the price and say well maybe if I buy a cheaper sirloin and marinate it a bit I can get by for less. These heavier crudes produce more petroleum coke or consume more catalyst and chemicals – running operating costs up. But, as we haven’t seen the run up in gasoline and diesel prices to match crude, the cheaper crudes may be the way to go – particularly in the winter when you want to maximize diesel and fuel oil yields anyway.
I don’t run the models any more and have no direct knowledge of what refiners are doing – but I would guess that they are making adjustments to crude and product slates to react to shrinking crack spreads.
I remember sometime around the year 2000 (don’t remember the year exactly) when Goldman said that if oil went to $50 then a world-wide depression would ensue. They weren’t too accurate with that prediction.
You wrote Overall inventories increased, but the EIA report, which you also quoted, said Total commercial petroleum inventories decreased by 1.1 million barrels.
Is this a mistake? Did you mean to say overall inventories decreased?
Re: Oil Shale, the article says Shell’s process will be economically viable at $30 barrel oil, which gives them quite a bit of head room.
First they have to get past the environmental lobby, which is certain to oppose it.
Did you mean to say overall inventories decreased?
Yeah, already fixed. I made a couple of other errors, trying to rush this out. I think they are all fixed.
I wonder if the high gasoline imports are nothing more then a result of a lag effect. After all, most of the contracts to import the stuff were likely signed before the dollar started really dropping right?
Otherwise, I don’t understand how imports can still be strong even though the price at the pump has not change all that much.
Otherwise, I don’t understand how imports can still be strong
Where else is Europe going to dump all their excess gasoline? Too many tax incentives to buy diesel created that problem.
Energy inputs for Shell’s in situ oil shale process are high, but not a showstopper. I once did some crude math which supported their 3:1 EROEI claim. The 7:1 upper bound mentioned in the article is more of a stretch, but I wouldn’t say impossible. These numbers are in line with oil sands, which is ridiculously profitable today.
The economics are hard to judge. Shell’s in situ approach requires a lot of wells, but not nearly as much above-ground plant as oil sands. If they can really produce all the natural gas they need onsite, the $30/bbl cost sounds achievable. Of course it’ll take decades to ramp volumes to a meaningful level.
Look at the 2006 numbers versus 2007. Crude inventory levels are at about the same levels as last year. Gasoline demand is down compared to the same month last year.
If crude oil inventory draw downs increase price, then how does one explain increasing prices during crude inventory builds in the spring?
Doug says to look at the rest of the world, but the US is 25% of the market. Crude is used primarily for transporation fuel. Did Europeans and Asians just start driving a lot more?
Crude prices are becoming a lot like global warming. If it is too hot its global warming, if too cold, GW. More hurricanes, less, it doesn’t matter. The answe is always GW. So why bother with the fundamentals of the crude physical markets, or cost of production. The answer is that crude must always cost more!
WTI is up nearly $4 to $94.15 after the EIA report was released. Fed meeting results not out yet. Robert’s $1,000 is teetering on the brink.
Fed Funds rate down 0.25%. Crude is off to the races. Up $4.15 to $94.50.
Hi,
I am a student at the University of California at Santa Barbara. I am currently creating a survey for Santa Barbara and Ventura Counties in California about the population’s views on energy.
If you have time, would you mind e-mailing me at justgravy@umail.ucsb.edu? (I could not find your e-mail address on the page, which I am sure is on purpose) I have just a few questions for you.
I completely understand if you do not have the time to do so.
Thanks for your time and your very informative blog.
Evan Smith
Singapore has crude at over $96.
I thought this was interesting:
OPEC says don’t blame us
The Qatari Energy Minister, Abdullah bin Hamad al-Attiyah, spoke even more bluntly about what he described as the futility of pumping more oil into the market to bring down prices.
“To increase by 500,000 or one million barrels, do you believe today it will bring back the price?” Attiyah asked. “I don’t think so,” he said, emphasizing his view that the price of oil had become almost wholly decoupled from supplies.
Financial players “lost a lot of money on real estate, shares and bonds, and then they jumped to commodities,” including oil, Attiyah said.
Even OPEC says that prices have nothing to do with supply and demand. Can you say tulipmania ?
Just a quick question — what do you mean by “the U.S. Commodity Futures Trading Commission has noted that the long to short ratio has grown rapidly throughout this rise”?….Futures markets are zero sum, so how do they figure a difference between the amount of longs and shorts?
Here’s column begging to be written: Will $100/bbl oil derail the Chinese economy? If yes, then what?
Some exerpts from the WSJ article: Yesterday’s step thus came as a surprise, but doesn’t go far enough to cure China’s basic problem. If China doesn’t fully liberalize fuel supplies and let prices rise, it could face even-worse energy-supply bottlenecks. Tuesday’s queue-jumping killing may offer a preview of the social unrest that long waits at the pump could spur.
But China is in a bind because rising fuel prices could also heighten societal pressures. The country’s leadership has made a key issue of addressing the growing gap between China’s swelling ranks of urban rich haves and usually rural have-nots. The poor and middle class are already reeling from soaring prices of staple foods.
In August, Premier Wen Jiabao visited a pig farmer to highlight his concern about the rising cost of meat. A big jump in fuel prices, especially diesel, would hit rural farmers especially hard. Their incomes continue to lag far behind salaries in cities like Shanghai or Beijing, and Chinese leaders worry a bigger gap could eventually spark social instability or even threaten the Communists’ grip on power.
Rising oil prices could yet derail the still-booming Asian economy. Countries there have widely used fuel subsidies to spur strong economic growth. But cheap fuel also distorts demand and discourages consumers and industry from being efficient. The McKinsey Global Institute, the consulting company’s economics-research outfit, estimates that “ending fuel subsidies worldwide would cut demand for transportation fuels by three million barrels a day.” That’s equal to roughly 3.4% of daily use.
Moreover, the subsidies come at a steep cost to governments, and they can create distortions that stress the broader economy. In 2005, for instance, Indonesia’s currency and equity markets nose-dived amid concerns over whether the government could continue to foot the bill for its big subsidies.
IMHO Chinese officials (and many other Asian countries) are trying to manage the unmanageable – and the result is not going to be pretty, for China or anybody else. Oil prices would come down, though…