This Week in Petroleum 11-15-07

2nd Update

Now, 30 minutes after the release of the report, the market is starting to react, and oil prices are falling. Are traders really that slow to react? Or is that some kind of mirage because there is a delay in getting trades executed and reported? I get the impression sometimes that I could make a small fortune trading within the first half hour after the release of the inventory report. Seriously, someone who trades, please fill me in on this. With a big surprise like this, you can probably predict the direction prices are headed short-term with a high rate of success. But the reaction seems to develop very slowly. My question: If I placed a trade at 1 minute past the release of the report, when would I expect it to execute?

Updated following the release

Surprise, surprise. I don’t know that anyone expected a big rise in crude stocks, but that’s what we got:

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) rose by 2.8 million barrels compared to the previous week. At 314.7 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 0.7 million barrels last week, and are at the lower end of the average range.

Crude imports showed a big jump, but are still down over this time last year:

U.S. crude oil imports averaged nearly 10.5 million barrels per day last week, up 831,000 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 387,000 barrels per day less than averaged over the same four-week period last year.

And why were gasoline inventories up? As I said before the release, if utilization goes up, gasoline inventories should go up. Utilization was up to 87.7%, a sharp rise from last week. The prediction from the analysts didn’t make much sense to me – refinery utilization up a good bit and a draw on gasoline inventories.

I didn’t expect crude inventories to head up before next week. The market hasn’t reacted much to this, which is surprising. Crude prices were down slightly before the inventory release, but typically I would expect a suprise of over 3.5 million barrels of crude to move the market more. So far, the market is barely reacting, but maybe I haven’t given it enough time. I think I would have been prone to go short 30 seconds after I saw that report.

To be updated following the release of the report

First off, the report was of course delayed by a day due to Veterans Day in the U.S. Expectations are for another crude decline, which given the storms in the North Sea and the flooding in Mexico is a pretty good bet. Here were the predictions per Reuters:

A Reuters poll shows that Thursday’s U.S. inventory data is expected to show crude stocks dropped last week by an average of 800,000 barrels, which would be the fourth consecutive weekly decline.

Analysts also expect 100,000 barrel draws in both distillate and gasoline stocks. Refinery runs were forecast to be up 0.5 percentage points.

(A poll by Dow Jones predicted a more modest 300,000 barrel crude decline). The market’s reaction to this week’s report is complicated by several factors. Oil prices rose on Wednesday, due to a combination of expectations of an inventory drop, as well as remarks from Saudi that they won’t discuss a production boost at this weekend’s OPEC meeting, but will instead delay that discussion until their December 5th meeting.

While a drop in crude inventories should typically favor a rise in price; 1). Some of that rise is already built in due to analysts’ expectations of an inventory drop; and 2). The December WTI contract expires tomorrow, and there is a significant net speculative long interest that will probably be anxious to take profits. That may limit the upside. (There is also the factor that a large draw may cause crude prices to run up a few more dollars, but that would increase the pressure on Saudi to placate the markets at this weekend’s meeting).

I do question the prediction that there will be a gasoline draw and a 0.5% increase in refinery utilization. Utilization has been lagging, but if the number ticks up this week, I would expect gasoline inventories to build. I think the recent uptick in gasoline prices will also cut into demand a bit, further improving the likelihood of a gasoline build. If utilization doesn’t improve, then I would expect that we would see a draw on gasoline.

Of course gasoline stocks remain near record-low territory, so any negative surprises there could quickly impact prices. Gasoline prices have recently started to climb, but that climb has not kept pace with the climb in oil prices. Based on where gasoline inventories stand right now, it’s going to take quite an inventory build at this point to avoid $4 gasoline in the spring.

15 thoughts on “This Week in Petroleum 11-15-07”

  1. I only watch Cramer for the entertainment value, and for the “Cramer bump”. Time to put in a limit order on some options!

    Anyway, he seems to be joining the doomers and touched on several points RR has made in the last week:

    Cramer on BloggingStocks: Seven oil stocks to buy now

    A few excerpts: There is a sense that the Saudis can flip a switch and start pumping much more oil. I call your attention to a speech made by Conoco (NYSE: COP)’s (Cramer’s Take) Jim Mulva made last week where he says he doubts the Saudis can add even a few hundred thousand barrels per day. Further, I’d put in evidence the excellent series given to us by Chris Edmonds from the Middle East, which support this notion and further talk about dramatic drops in oil findings and oil reserves there.

    Now, let’s deal with IEA. This organization has been wrong the whole way. We are suddenly supposed to believe that they get it? Now they are smart and before they were dumb?

  2. robert:

    to answer your inquiry about trading on the inventory report. i’ve been trading oil futures for the past 3 years and i dont think there is that much money to be made trading on the reports. that’s from experience. it’s at best a 55-45 winner. but there were times when the market just straightup ignores the report and i can recall more than a few of these instances.

    how long does it take to execute the trade? if the order is submitted online as a market order, it executes w/i seconds.

    anyways, to everyone: for more inquiries about tradiing oil and stuff email me at
    i’m a licensed commodity trading advisor and peak oil has treated me very well 🙂 i expect the trend to continue.

  3. Robert,

    I too want to hear from a trader. My simple guess would be that this delayed reaction involved a combination of herd mentality, greed and fear. But, to get a look at a pie chart that separates those three factors, along with other elements, we need someone from a good trading desk. Didn’t you mention on TOD the other day of a Goldman Sachs person popping up here?

  4. Robert-
    Love your blog..try and read daily. I do want to ask though, are you sure you are not looking at 30 minute delayed quotes for Oil. I am looking at the real time chart right now and the price decline started at 10:25 EST then again at the report release at 10:30 EST. The low of the day occurred at 10:43 EST. Since then the market has rallied slightly. So if you were to sell one minute after the report you would currently be at the money and you can see the current low for the day was put in soon after the report. I agree with the previous comment, it is hard to trade the reports, there are way too many fade the stats days and the market just doesn’t pay attention to the report.

    To your question regarding trading, you would get filled immediately on a market order after the report, crude is extremely liquid. The question would be on your slippage.

  5. I am checking quotes on the NYMEX site. I just checked a quote, and it was 15 minutes old. If that is the case, then it makes more sense. Where can you get more timely quotes?

    Regarding Goldman Sachs, yes, a lot of brokerage houses stop by here every day. For instance, just scanning down the past hundred visitors or so on my StatCounter, I see Merrill Lynch, T. Rowe Price, and Sempra Energy. That’s just financial interests who visited in the past hour or so. There are also lots of energy consultants in there.

  6. Robert,

    To get real-time data from NYMEX, you have to pay for it and get it through your Bloomberg or Reuters terminal, or some other means, which also must be paid for. It’s not cheap. At least to a federal government agency.

  7. Did I give a link to that talk Rodney Brooks, the Artificial Intelligence researcher? He started trying to make “smart insects” because people had been to grand in their dreams. Those insects became the Roomba vacuum, and the Packbot.

    Anyway, he said something like “we aren’t as smart as we think we are” and “I see humans as big insects.”

    Death threats against CEOs are sad, but you know, we aren’t as smart as we think we are. And people get stuck with a simple story in their heads.

  8. I thought I saw a bit that stated the API of the imported oil was going up. Perhaps the KSA has more sour heavy oil available, but it looks like the light sweet stuff will be a memory soon.

  9. Just saw this on Bloomberg, which is exactly what we have been discussing for a couple of weeks: The crude drawdowns have been partially due to refiners deliberately pulling down inventories instead of paying $95 for oil:

    “The jump in imports was enough for refiners to increase runs and still leave additional barrels to build stocks,” said Tim Evans, an analyst with Citigroup Global Markets Inc. in New York. “The rise in imports is evidence that the declines we saw in recent weeks were a function of inventory management, not a shortage of oil.”

    Citigroup visits here on a daily basis; maybe that’s where they got the notion. 🙂

  10. As others have said, the ’30-minute delay’ is assuredly due to your price data being delayed. I can assure you the price dropped instantly the inventory build appeared on the newswires and EIA website.

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