Why Oil Prices Defied Expectations

Happy Thanksgiving to all! It was a normal work day here in Scotland for me, which stinks. But I am now home, the turkey just came out of the oven, and soon I will be sitting down to watch the Dallas Cowboys on my Slingbox. What a great invention that thing is!

A lot of people – including me – were very surprised that we didn’t break through the $100/bbl barrier on Wednesday. After all, analysts had expected a large crude build, and instead there was a large draw. Given that on Tuesday night WTI had traded as high as $99.29 – and as nervous as the markets have been – I thought $100 was a sure thing given the bad news.

Yesterday’s OPIS report has an explanation for why traders may have discounted the news:

Crude oil overnight traded up to $99.29/bbl, but only got as close as $98.70 during the pit session even after the DOE reported a draw in crude oil inventories. However, a closer look shows that Cushing crude oil stocks grew by more than 1 million bbl. After yesterday’s big gains, today’s losses were relatively minor in scope with the January contract settling at $97.29/bbl loss of 74cts.

Crude oil inventories dropped by 1.1 million bbl last week, but a look at the Cushing stocks, the NYMEX WTI delivery point, inventories grew by 1.2 million bbl. A large chunk of the drop came on the Gulf Coast as stocks there fell by 1.9 million bbl, but the stock draw could be a result of a decent sized drop in crude oil imports. Crude imports fell to 9.82 million b/d a drop of more than 600,000 b/d.

The report also raised concerns over distillate supplies:

While most of the attention this holiday weekend will be placed on gasoline prices and the driving public, it’s the retail price of diesel that is setting all the records and global tightness is contributing to strong heating oil futures.

Distillate demand over the last four-weeks has been red hot and is running some 3.2% over the same time last year. Sources tie the strong demand to exports heading mostly to Europe from the East Coast and Gulf Coast as refinery glitches across the Atlantic have opened the export window.

East Coast heating oil inventories last week saw a drop of 1.4 million bbl as the first real cool weather headed into the Northeast. There is cause for concern if there is an extended cold snap as current East Coast heating oil inventories are nearly 9 million bbl behind the same time last year.

I’ll worry about that tomorrow. It’s turkey time.

5 thoughts on “Why Oil Prices Defied Expectations”

  1. Did you see that Time used your peak lite idea in an article on Peak Oil? Peak Possibilities

    In “peak lite,” as some call it, the big issues are not so much geological as political, technical, financial and even human-resource-related (the world apparently suffers from a dearth of qualified petroleum engineers). These factors all delay the arrival of oil on the market, meaning that production would not so much peak as plateau. But with demand rising sharply, especially from China and India, even a plateau could be precarious.”

  2. It’s turkey time, and time to think about how much oil is in each turkey. My father was once involved in a large turkey production operation. That was years ago, but apparently turkey production has changed little since then. Feed, energy costs for the feedlot buildings, hauling turkeys to processing plants, processing itself, and hauling processed turkeys to supermarkets eat up a lot of energy. And this is just one, relatively small industry.

  3. Can someone explain why the increase in supply in Cushing should make a difference if the overall supply is still lower? Does the oil in Cushing not count toward the total number?

  4. It does, but the numbers in Cushing are much closer to the Nymex delivery point. In recent weeks, it was the Cushing number, and not the overall number, that drove oil prices. After all, the total oil inventory number is still above average. It’s the Cushing volume that’s low.

  5. This is a digression, but it is related to the comments on distillates and the supply situation in general. The BBC just ran this story about the political effect of high diesel prices in Bolivia (it has lead to protests). It made me wonder, how does the US demand for imported products – oil, gasoline, and distillates – affect relatively poor nations? How tightly linked are US and global supply issues? It’s interesting that the protests in Burma also were reported as having started because of high fuel costs. I also wonder if our focus on US stocks is distracting from the more immediate impacts on these smaller, poorer nations – these, however, seem hard to quantify. In short, I wonder what’s going on in the rest of the world. I apologize if this isn’t the correct forum to introduce this line of thinking

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