Whoa! The analysts missed this one by a mile. Here were the predictions, prior to the release of the report:

Analysts surveyed by Dow Jones Newswires on average predict crude inventories rose 300,000 barrels during the week ended Oct. 19, and Vienna’s PVM Oil Associates also noted that “expectations for this week’s U.S. oil inventory data are for a rise in crude oil stocks.”

However, some analysts predict a decrease of up to 2 million barrels. Analysts also predict the EIA report will show refinery utilization rose 0.3 percentage point; gasoline supplies, still near record lows, rose 1.1 million barrels; and distillate stockpiles, which include heating oil and diesel, rose 200,000 barrels.

Here’s what they got:

U.S. commercial crude oil inventories fell by 5.3 million barrels compared to the previous week. At 316.6 million barrels, U.S. crude oil inventories are near the upper end of the average range for this time of year. Total motor gasoline inventories decreased by 2.0 million barrels last week, and are at the lower end of the average range.

Both finished gasoline inventories and gasoline blending components fell last week. Distillate fuel inventories decreased by 1.8 million barrels, and are at the upper limit of the average range for this time of year. Propane/propylene inventories increased 0.6 million barrels last week. Total commercial petroleum inventories decreased by 7.9 million barrels last week, but are in the upper half of the average range for this time of year.

I suspect crude will be off to the races again. I had called a (short-term) top on front-month WTI a week ago at $89, and in fact oil was down almost every day since then. But this inventory report will provide a lot of fuel for the bulls for another week.

Here is the rest of the report:

U.S. crude oil refinery inputs averaged 14.9 million barrels per day during the week ending October 19, down 183,000 barrels per day from the previous week’s average. Refineries operated at 87.1 percent of their operable capacity last week. Gasoline production rose compared to the previous week, averaging nearly 9.0 million barrels per day. Distillate fuel production fell last week, averaging 3.9 million barrels per day.

U.S. crude oil imports averaged 9.1 million barrels per day last week, down 1,305,000 barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged 9.9 million barrels per day, or 414,000 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 838,000 barrels per day. Distillate fuel imports averaged 235,000 barrels per day last week.

Total products supplied over the last four-week period has averaged nearly 20.8 million barrels per day, up by 0.4 percent compared to the similar period last year. Over the last four weeks, motor gasoline demand has averaged 9.2 million barrels per day, or 0.2 percent below the same period last year. Distillate fuel demand has averaged nearly 4.3 million barrels per day over the last four weeks, up 1.0 percent compared to the same period last year. Jet fuel demand is down 3.3 percent over the last four weeks compared to the same four-week period last year.

It is going to be a close call on the $1,000 bet. I do believe the fundamentals for higher oil prices are generally worse now than they were 3 months ago. Peak driving season has passed, OPEC is already pumping more crude, and prices have had a dramatic run-up. On the other hand crude inventories, while still high, have been pulled down, and gasoline inventories continue to hover near record-low levels. But, the sentiment has certainly turned in favor of higher oil prices. And the sentiment of the market can move it quite a bit in a short period of time. You can see some of the analysts on CNBC – after having missed out on most of the run-up – have now moved their clients into oil and so are talking up the price.

But the recent fast run-up in prices, followed by OPEC’s decision to pump more crude, would make me very cautious about buying oil at this level. You might make some money, but it is a much bigger risk than it was earlier in the year when the fundamentals for higher oil prices looked better (at least to me). Of course over the long haul, I am bullish on oil prices and have been for 5 years. I thought $100 oil in 2008 was likely, but a move from $60.77 (the crude price the first week of January) to $100 in a single year would be unprecedented.

I would also add just a bit on refinery utilization. Analysts had predicted utilization to come up this week. Generally, refineries are coming out of their turnarounds now, and you would expect to see utilization at a higher level at the end of October. But you have to take the current crack spreads into account. When crack spreads are at $30/bbl, as they were earlier in the year, you do everything you can to maximize your utilization rate. If that means paying overtime, or paying extra to have equipment fabricated and delivered quickly, you do it. Money is not an object; you get your refinery up and running as quickly as possible.

But when crack spreads are $5/bbl, as they are now, you don’t do those things. You still want to have your refinery up and running, but it doesn’t make economic sense to go all out to boost your utilization. That $5/bbl margin will disappear pretty quickly if you throw money around. So, utilization rates will be less robust in times of low margins. It has absolutely nothing to do with inability to secure crude – as some have suggested. It has everything to do with economics. But given where gasoline inventories are currently setting, I don’t expect margins to stay soft for long.

From the Detroit Free Press:

Oil prices go sky-high, but don’t fear $5 gas

If oil prices reach $100 a barrel for the first time, does that mean gasoline will be $5 a gallon?

Analysts say no — gas won’t even hit $4, because oil supplies are good.

“This is 100% manipulation by the financial players … and the price of oil at this level isn’t justified by the fundamentals,” said Fadel Gheit, a veteran oil analyst with Oppenheimer & Co. in New York.

Fadel Gheit is probably the most quoted oil analyst in the world, and yet has been consistently wrong on the direction of oil prices for 5 years. It reminds me of Daniel Yergin, who wrote The Prize: The Epic Quest for Oil, Money and Power. Despite a track record of being wrong on the direction of oil prices, he is still the “go to guy” when someone wants to know where oil prices are headed. One wonders if their clients have been asking for refunds lately.

In answer to the essay title, no, it isn’t 100% manipulation as Gheit claimed, but I think he is correct that $90 crude isn’t justified by the fundamentals. The long interest is certainly high and growing, and that alone will drive prices higher as a self-fulfilling prophecy. But there are legitimate supply concerns that OPEC hasn’t yet answered, and it is the expectation of what this could mean that is putting the pressure on prices. If OPEC doesn’t respond soon, $100 will just be a speed bump. If they do, prices will probably drift back down to the $70’s.

But if oil prices hang around at this level for long, come spring you will see gasoline prices again setting record highs. $4 is not out of the question. After all, the price of gasoline is not entirely dictated by the price of oil. Last spring we saw a disconnect as refinery capacity couldn’t keep pace. So even if oil supplies are adequate in the spring, but gasoline inventories are still this low, yes, we will probably see $4 gasoline.

I have been engaged in an e-mail exchange with a journalist overseas who is writing an article on gasoline pricing in the U.S. I don’t want to give anything away, so I won’t be any more specific than that. However, I do want to share a couple of responses that I sent regarding some questions of price-gouging. In one response, I commented on the writings of Tim Hamilton and Jamie Court at the FTCR. I have documented their cluelessness in a previous essay:

Another Uninformed Consumer Watchdog

This time, I was asked about this particular document by Court and Hamilton:

Low gasoline inventories set the stage for $4 at the pump in 2006

Their claim is that oil companies are engineering price spikes by purposely keeping inventories low. I am really stunned at the level of ignorance displayed here. I looked back at some of their earlier writings, and they were advocating steps that we need to take to keep gasoline under $2.00 a gallon. Do they really think cheap fuel is a good thing? Apparently they do, which tells me they haven’t thought through the implications. I guess they don’t understand that low gasoline prices will simply enable us to run through our fossil fuel endowment at the maximum possible rate.

First, they seem to think that oil companies exist primarily to serve the public’s desire for cheap gasoline. However, oil companies exist to make a profit, and have a responsibility to their shareholders. Court and Hamilton also criticize the oil companies for their profits, even though oil company profit margins are about average for all industries.

What they did get right is that inventory levels do dictate pricing. However, the suggestion that oil companies are purposely keeping inventories low in order to maximize profits is ludicrous. Lack of refining capacity required to meet the (too) strong U.S. demand is a serious issue. Just look at refinery utilization, which is a number that is publicly available at the Energy Information Administration. Prior to Hurricane Katrina, utilization was running at 95%, which is close to the maximum possible level. (Some capacity is always offline for maintenance). Following the hurricane, some very large refineries were knocked offline and utilization dropped to about 85%. However, those refineries that were unaffected were still running just as hard as they could. Fall maintenance was postponed in order to supply needed product to the market. By spring, that deferred maintenance had to be completed, and this again reduced capacity. (Spring is a very popular time for maintenance, because summer demand hasn’t yet picked up, and the weather is usually cooperative.)

However, let’s assume for a minute that refinery capacity is not an issue. What if we could make as much gasoline as we wanted? Would we run with completely full inventories? Do you know of any business that runs with grossly excess inventories? If we maintain a 100,000 barrel gasoline tank 95% full all of the time, instead of 75% full all of the time, there are 20,000 barrels of product constantly in inventory that exist merely as additional cost to the company. Those 20,000 barrels represent oil that was purchased, but is just setting there earning no dollars. The only reason for maintaining extremely high inventories would be to make sure the public is never inconvenienced, and is always able to purchase cheap fuel, regardless of the costs to the oil companies.

Even thought on rare occasions it might be nice if the tank was 95% full, that additional 20,000 barrels is an added cost on all other occasions. Businesses do not manage inventories in the way that Hamilton and Court believe they should. When there is a hurricane in the Gulf of Mexico, businesses quickly run out of flashlights and bottled water. Does this mean that all Gulf Coast businesses should stock twice as much inventory at all times, just in case a hurricane hits? It would not be profitable to tie up that much money in inventory, in anticipation of an event that will only take place on a multi-year cycle (for a given location).

I would point out that a recent report by the California Energy Commission refutes the outrageous claims of Court and Hamilton. Taken from a recent OPIS report:

Parts of California’s high profile report on the huge gas price spikes in the state last spring read like a re-run of some past probes.

The report, by the California Energy Commission, puts down refinery outages leading to a supply squeeze, coupled with a surge in exports, as the key factors behind record high prices in the state this year.

The lengthy report cites a stunning number of planned outage days at California refineries in the first six months of 2006 compared with same period last year – 175 vs. 58. Most of the unplanned outages, comparing the same periods, lasted twice as long this year.

Also, it found port congestion a factor, as well as high additives costs and the introduction of the new ultra-low-sulfur diesel fuel (ULSD).

It dismisses the notion held by some that pump prices dashed to $3.33/gal because refiners practiced price gouging (dubbed goug-onomics by some consumer groups).

Refiner group WSPA cheered the CEC’s findings saying that they confirm its assertions that market condition is behind the price volatility this year.

Not surprisingly, the FTCR cried foul:

The Foundation For Taxpayer & Consumer Rights, an industry watchdog, called the CEC’s findings a “whitewash.”

“Oil companies are ripping off Californians in exactly the same way electricity profiteers did by artificially shorting the market,” snapped FTCR President Jamie Court.

I guess they can’t handle the truth, which is that market forces dictate prices. In conclusion, it is clear that Court and Hamilton know nothing about running a business, nor do they understand basic economics. They project their views as to how oil companies should be run, and then criticize them for not running in this way. However, if oil companies operated as they believe they should, shareholders would flee the company, profits would plummet, and new capital for capacity expansions would be hard to come by.

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.”

A few newsworthy items to cover: Gas prices, gas gouging legislation, and food versus fuel.

Gas Prices on the Rise

Surprise! It seems that gas prices are rising:

Gas prices on the rise again, analyst reports

Gas prices are on the rise again, just as Americans hit the highways for Thanksgiving.

Gas prices rose about 5 cents per gallon nationwide compared to two weeks ago, industry analyst Trilby Lundberg said Sunday.

Of course if you read this blog, you knew this was coming. I have made this case in two recent essays, and I have been saying this at The Oil Drum for about a month:

A Case Study in Cluelessness

This Week in Petroleum 11-15-06

Gasoline inventories are being sharply pulled down for three primary reasons. First, demand has picked up as prices have fallen. Second, gasoline imports fell off as prices dropped and European refiners saw profit margins fall on exports to the U.S. Third, we are in the middle of fall turnaround season, when refineries shut down for maintenance. All of these factors are causing gasoline inventories to free fall, and that situation can’t continue, regardless of how the elections turned out, unless 1). Imports make up the difference; 2). Prices rise to slow demand; 3). We start rationing product; or 4). We just keep going like this until stations start to run out of gas.

Keep a close eye on the inventory report this week for a hint of which direction prices are headed in the short term.

Price Gouging and Fuel Supplies

A couple of days ago the following article was highlighted at The Oil Drum:

Congress seen passing price-gouging law

Some excerpts:

WASHINGTON – The head of the Federal Trade Commission predicted Thursday that Congress would pass a gasoline price-gouging law despite her warnings that the country doesn’t need one and it might cause fuel shortages.

FTC Chairwoman Deborah Platt Majoras said she has warned Congress publicly and privately about the dangers of such a law.

Majoras said she understood the public’s frustration and concern but said an upcoming FTC report on the price spikes found that consumer demand was up at the time.

“There is a distinction between a market determination you don’t like and a market failure,” she said.

Testifying in May before the Senate Commerce Committee, Majoras said retailers might let the gas run out rather than raise prices and risk facing prosecution. She noted the price spikes after Hurricane Katrina last year resulted in more fuel getting to market.

I commented on the story:

I think this is likely with the new political climate, but this is very short-sighted. What they don’t seem to realize is that if prices are frozen during a Katrina-like crisis, then rationing is the only other option. I think most people would prefer to pay more for their gas (rationing by price) than for everyone to be told they are only getting 75% of the gas they would like.

I generally get some negative feedback any time I write anything in defense of the oil industry (like this example), but one poster provided the following feedback:

Several years ago the Canadian province of Prince Edward Island implemented a similar scheme to set fixed gas prices for specific periods in an attempt to prevent price “gouging.”

The outcome was as described in the RR blockquote. Gas prices did not rise; there was also no gas available anywhere on the island and no plans to import any.

The legislation was repealed.

Anyone who understands the first thing about economics knows that this has to be the outcome. If you can’t raise prices when demand is high, then we have gas lines, rationing, and ultimately no gas. I don’t know if this is the solution they want, but it’s what they will get.

Food versus Fuel

Many ethanol advocates argue that increasing the amount of corn that is going toward ethanol production is not an issue. However, it is certainly an issue for the people who have relied on those corn imports, and are now watching the price rise. Today, Tyson Foods weighed in on the subject:

Tyson Foods Sees Higher Meat Prices

“The best thing I can say about fiscal 2006 is, it’s over,” Richard L. Bond, president and chief executive officer, said in a statement.

Bond said the price of corn, which is used as animal feed, is going up because of demand from ethanol plants that are springing up to provide alternative fuel sources to oil.

Corn prices recently reached 10-year highs.

“I believe the American consumer is going to have to pay more for protein. We are at new levels on corn that are not likely going to be retrenching back to ‘06 levels,” Bond said in a conference call with analysts.

Bond said meat producers, processors and retailers will have to pass the higher grain price on to consumers because they cannot absorb it in their profit margins.

“Quite frankly the American consumer is making a choice here. This is either corn for feed or corn for fuel, that’s what’s causing this,” Bond said.

Of course food versus fuel is a serious issue going forward. How could it not be? Some people will pay more for food so we can put inefficiently produced ethanol in our vehicles, and some people will have to start making some tough choices as budgets are stretched.

Updated

Gasoline inventories did in fact edge upward, as gasoline imports were very strong. Had that not been the case, gasoline inventories would have definitely come down, as utilization continues to trend down. In fact, just glancing over the data, more gasoline may have been imported this January than in any other January before. As long as that continues, gasoline prices won’t gain much traction. But European refiners have to take turnarounds as well, so gasoline imports typically fall off in February and March.

Here is the summary:

Summary of Weekly Petroleum Data for the Week Ending January 25, 2008

U.S. crude oil refinery inputs averaged 14.6 million barrels per day during the week ending January 25,down 302,000 barrels per day from the previous week’s average. Refineries operated at 85.0 percent of their operable capacity last week. Gasoline production edged slightly lower compared to the previous week, averaging about 8.9 million barrels per day. Distillate fuel production fell last week, averaging nearly 3.9 million barrels per day.

U.S. crude oil imports averaged about 10.1 million barrels per day last week, down 100,000 barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged 10.1 million barrels per day, unchanged from the same four-week period last year. Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged nearly 1.2 million barrels per day. Distillate fuel imports averaged 277,000 barrels per day last week.

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) rose by 3.6 million barrels compared to the previous week. At 293.0 million barrels, U.S. crude oil inventories are in the lower half of the average range for this time of year. Total motor gasoline inventories increased by 3.6 million barrels last week, and are above the upper limit of the average range. Both finished gasoline inventories and gasoline blending components inventories increased last week. Distillate fuel inventories declined by 1.5 million barrels, and are in the lower half of the average range for this time of year. Propane/propylene inventories decreased by 3.0 million barrels last week. Total commercial petroleum inventories decreased by 1.0 million barrels last week, and are in the middle of the average range for this time of year.

Pre-Release Commentary

OPEC is meeting later this week, but the comments coming from various members indicate that they are unlikely to boost production. I think this continues the theme that we saw most of last year, where truly low inventories were mostly prevented by higher prices, and then OPEC used the inventory situation to suggest that markets are adequately supplied – which completely ignores the price signal. But certain OPEC members have now grown dependent upon the revenues provided by $100 oil. As long as they maintain solidarity, it is unlikely they will allow the price to drop too much – recession or now.

Here is what analysts are forecasting for this week:

A Reuters poll of analysts ahead of weekly U.S. government inventory data forecast a 2.1-million-barrel rise in crude stocks, a 1.9-million-barrel draw in distillate inventories and a 2-million-barrel build in gasoline stockpiles.

If spring turnarounds are indeed starting early, then the only way gasoline stockpiles will build is if gasoline imports remain strong (which they were last week). If that is the case, then $4 gasoline will remain elusive, as imports will keep pressure off of inventories.

That same story also had a note about speculative positions:

U.S. regulator data on Friday showed NYMEX crude oil speculators slashed their bets on rising prices in the week to Jan. 22 to their lowest since mid-December, cutting net long positions by nearly 50,000 lots to 37,000. “It shows the large speculative funds reducing aggressively their net length exposure on futures through a combination of long liquidation and fresh short positions,” said Olivier Jakob at Petromatrix.

There is concern about a recession dropping prices, but I think the counter to that is that OPEC would probably be willing to cut if prices dropped too much. I will update following the release of the report.

Really late getting this out this week, but it has been a very hectic 24 hours. I have about 3 posts I need to write up.

This week’s report highlights:

U.S. crude oil refinery inputs averaged over 15.4 million barrels per day during the week ending April 13, up 372,000 barrels per day from the previous week’s average. Refineries operated at 90.4 percent of their operable capacity last week.

So, as I have been saying, refineries continue to come out of their turnarounds.

But….

Total motor gasoline inventories fell by 2.7 million barrels last week, and are below the lower end of the average range.

This is shaping up to be a problem. Gasoline imports are back up, as you might expect with prices at this level:

Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged over 1.0 million barrels per day.

So, imports are relatively high, refinery capacity is quickly returning to normal, but inventories are still being drawn down. Gasoline levels are now at levels not seen since the aftermath of Hurricane Katrina. The last time inventories were this low in mid-April was 2003. However, when they hit this level in 2003, they did rise the following week. So next week should be a good indicator of what’s in store. If inventories fall again next week, we will have to go back to 2001 to find a similar inventory level. And I don’t think I have to mention that demand is much higher now than it was 6 years ago.

On a “days of supply on hand” basis, if I go back to 1991 – which is 841 data points, this week’s days of supply on hand is the 12th lowest during that time. In other words, in the past 16 years, 98.5% of the time we have been in a better gasoline inventory situation then we are in now. I would also point out that in April, over that same time frame this is the lowest day’s supply on hand that we have had. The 2nd lowest? You guessed it. The week before. So, this is not a typical situation. (But I will go out on a limb and say that within 2 weeks the gasoline inventory trend will reverse direction).

Unless more imports hit the shores soon, I think we will continue to see higher pressure on prices. But, the author of This Week in Petroleum doesn’t necessarily buy that, as I will show in just a second.

Other relevant pieces from the report:

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 1.0 million barrels compared to the previous week.

This has been expected, as refineries coming out of their turnarounds will tend to draw down crude as they gear up for high demand season.

Crude imports are also up:

U.S. crude oil imports averaged over 9.9 million barrels per day last week, up 115,000 barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged 9.9 million barrels per day, or 84,000 barrels per day more than averaged over the same four-week period last year.

The Price Debate

The author of This Week in Petroleum, Doug MacIntyre, stopped by last week’s essay This Week in Petroleum 4-11-07 and left some comments about price. I inserted a few comments [like this]:

Doug MacIntyre, the primary author of This Week In Petroleum (TWIP), stopping by again! Thanks for linking to us and pointing us out as a useful resource. We certainly try to provide taxpayers their money’s worth.

Given that I’m writing this on April 19, I’m sure you have read our latest TWIP [you bet I had!], where we show how recent history has indicated that we are not guaranteed of seeing higher prices on Memorial Day or around July 4, than we see in mid-April. I think retail prices will be heading down soon, possibly as early as our next price survey on Monday – see:

http://tonto.eia.doe.gov/oog/info/gdu/gasdiesel.asp

after 4:30 pm ET on Mondays), even with gasoline inventories continuing to decline. But gasoline production is up, refineries are coming back, and hopefully, gasoline imports will rise, all adding to supply and hopefully, reversing the inventory trend [I also expect the inventory trend to reverse within 2 weeks, but this year has been abnormal]. Some of the inventory decline recently may be a dumping of winter-grade gasoline to make storage room for summer-grade [but, this is the lowest days of supply we have had on hand at this time of year since at least 1991]. The big questions are how much (or little) will retail prices fall, and will they rise even higher later this summer? I believe these are still tough questions to answer at this point, but I would expect to see retail prices starting to come down, if not this coming Monday (Apr. 23), then perhaps by Apr. 30.

He also posted a graph at This Week in Petroleum of gasoline price trends since 2000:

My Response

In response to that, I would say that it just depends on inventories. We are going into high-demand season in worse shape than we have been in for a while. Unless the trend reverses (gasoline stocks have declined for 10 weeks now) then I do expect prices to continue trending higher. Although on a week to week basis we might see no change or even a decline in prices, I think on a month to month basis falling inventories will continue to keep upward pressure on prices until the demand is brought back into balance with available supply.

Is Peak Oil upon us? This opinion seem to be gaining in popularity due to the recent price spikes in crude oil and gasoline. Many feel that the markets are signaling that the peak is here.

I have previously written several articles about the rise in gasoline prices. Gasoline prices are increasing due to a number of factors, including rising oil prices. However, the principal reason for rising gasoline prices is falling gasoline inventories, which have been exacerbated this year by some refineries still being off line due to damage from Hurricane Katrina.

Oil prices are a different matter. There are certainly some supply/demand issues, in that there is less excess capacity than there used to be. Geopolitical events have a greater influence than ever on worldwide oil prices due to the tight supply/demand issue. There is a major fear premium built into the price of oil right now, particularly due to uncertainty over Iran. Another factor affecting oil prices is increased speculation. A number of economists are suggesting that the price is higher than market fundamentals would dictate:

Economists at TD Bank Financial Group are warning that oil and base metal prices are ripe for a 20-per-cent correction later this year.

The authors of the current TD Economics commodity price report say the recent buying wave is due more to speculation than to market fundamentals.

Speculation in oil and gold, they write, has been led by geopolitical worries. In base metals, the report authors say, the speculative frenzy has been driven by little more than momentum.

The co-authors say the pull back will be triggered by signs that U.S. economic growth is slowing, which they say should happen by the end of the summer.

“In the meantime, we don’t rule out further speculative activity driving prices even higher,” they wrote. (1)

Ron Scherer reports in The Christian Science Monitor (2):

“Almost everyday it seems some pension fund is dedicating a portion of its assets to invest in a commodity index,” says John Kilduff, an oil trader at FIMAT, USA. “And, energy dominates most of these indexes.”

Since 2004, Mr. Kilduff says some $125 billion has been directed into these funds. As the investment pool grows, the financial institutions running them buy futures contracts. “It causes more participation, it helps to push up prices,” says Kilduff.

The same report indicates that it is not a shortage of oil that is driving oil prices higher:

“I think we’re due for a pause here,” says Mark Routt, of Energy Security Analysis Inc. in Wakefield, Mass. “All the bad news you can think of is in the market, and here we are.”

OPEC members have offered oil companies extra deliveries but have been turned down – an indication that there is plenty of crude oil available, Mr. Routt says. In addition, he points out that the current quarter is usually the low point in demand for crude oil. Refineries are busy conducting maintenance or shifting over to the summer blends of gasoline.

This opinion is also consistent with what I know about spare capacity in various areas. Producers are shutting in production in the Williston Basin due to low prices. (3) There is spare capacity in Canada, primarily due to pipeline limitations and bottlenecks in downstream refineries. Kuwait is reportedly offering to release another 2 million barrels a day if OPEC agrees. (4)

Nationwide, crude oil inventories are still hovering near an 8-year high, far above the average for this time of year:

Source: This Week In Petroleum at http://www.eia.doe.gov/

My point here is to argue that the current spiking prices do not signal a true Hubbert Peak, but are instead due to other factors. Someone asked me yesterday why it matters exactly when the Hubbert Peak occurs. Here was my answer:

Here is why I think it matters. If everyone calls for a peak this year, and production increases, what do you think the public is going to do the next time everyone calls for a peak? What I worry about is that premature calls of peak will cause the public to ignore it when it is very clear that a peak is imminent.

You are correct, in that it won’t matter much if peak is 3 years from now and people are calling for a peak this year. But if the peak is really 10 years away, and this is apparent in 3 years, we have some time to start preparing. But if we start warning people in 3 years, it is going to be hard to get their attention when they say “Didn’t you call for a peak in 2006?” That’s already happening to Deffeyes and Campbell. A lot of people have stopped taking them seriously.

I am primarily concerned about loss of credibility by false predictions of a peak. This is too important an issue to have the public ignore warnings of a peak, but this is exactly what’s going to happen if people keep saying “The peak is now”, only to retract again and again. On the other hand, I understand the flip-side. We certainly don’t want to say “The peak is in 20 years”, if the peak is in fact in 2 years. What we have to be certain of is that when we are making peak forecasts, we are not ignoring important pieces of data that will cause those forecasts to be off.

The argument over the timing of the peak may be merely academic. If Peak Oil occurs in 2010, it isn’t going to matter much that a lot of people were calling it in 2006. But if the peak will actually be in the 2015-2020 range, the debate over timing becomes more important. If we call a peak in 2006, and then another in 2008, combined with failed predictions in 2000 and 2003 (5), we will approach peak with an understandable level of public skepticism over the matter. This will make it much harder to convince the public and the government of the need to take serious steps aimed at mitigation.

Peak Preview

A more pressing matter may push the debate over the timing of the Hubbert Peak to the sidelines. I do believe that oil production will continue to increase for several more years. However, oil production has been increasing for the past 3 years (from 77 million barrels a day to over 84 million barrels a day), yet prices have climbed from less than $30 to over $70 a barrel. The reason for this is that spare production capacity has vanished because new production has not been brought online as fast as demand has grown.

To me, this is the real story. It’s like we are worried about starving to death (Peak Oil) in a few years, but we didn’t consider that the food we are consuming may already be insufficient to sustain us. If population grows faster than food production, people will starve even though food production may be growing. That’s the situation I see with petroleum right now. We don’t have to forecast a supply/demand imbalance. It is here. Strong demand growth in China and India ensures that this problem will not be going away anytime soon, and will probably be the reality right up until production actually does peak.

What does this mean? For all practical purposes, if my hypothesis is correct, the early effects of Peak Oil have arrived, without a true production peak. I think of this as “Peak Lite”, or a “Peak Preview” of things to come. As long as demand growth continues to outpace new production, it will have almost the same effect as a true decline in production. Prices will stay very high. The biggest difference is that Cornucopians may continue to point to increasing production as a sign that we don’t yet have anything to worry about. Meanwhile, prices will probably continue to trend higher (long-term; corrections can and do happen) which will put pressure on personal budgets, governments, businesses, and the economy as a whole. In reality, barring a worldwide recession, Peak Oil is here, it just doesn’t look like you expect it to. It reflects an inability to secure the energy supplies you need to keep economies growing. It means that rationing is here, but it will be rationing by price (at least in the beginning).

References

1. “Commodity price correction coming, TD Bank economists warn.”Yahoo Canada News, April 19, 2006.

2. “Why so high? Oil markets riding new currents.” The Christian Science Monitor, April 19, 2006.

3. “Regional oil prices drop off.” Billings Gazette, March 11, 2006.

4. “Survey: Gas up 25 cents in two weeks.” CNN.com, March 23, 2006.

5. The Many Wrong Predictions of Ken Deffeyes.

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.

2nd Update:

Well, we got that big surprise, primarily because crude imports were sharply down from last week. Some excerpts:

U.S. crude oil refinery inputs averaged 14.9 million barrels per day during the week ending November 16, down 151,000 barrels per day from the previous week’s average. Refineries operated at 87.0 percent of their operable capacity last week.

U.S. crude oil imports averaged over 9.8 million barrels per day last week, down 667,000 barrels per day from the previous week. U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) dropped by 1.1 million barrels compared to the previous week. At 313.6 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 0.2 million barrels last week, and are below the lower end of the average range. Distillate fuel inventories decreased by 2.4 million barrels, but are in the middle of the average range for this time of year. Total commercial petroleum inventories decreased by 6.9 million barrels last week, and are in the upper half of the average range for this time of year.

Updated: As oil stands again at the cusp of $100, here is what analysts expect for this week’s report report:

Analysts surveyed by Dow Jones Newswires, on average, predict that crude oil inventories rose by 800,000 barrels last week, while refinery use grew by 0.4 percentage point to 88.1 percent of capacity.

Gasoline inventories likely grew by 700,000 barrels, the analysts predicted, while inventories of distillates, which include heating oil and diesel fuel, fell by 400,000 barrels.

While oil supplies likely rose last week, prices were being supported Tuesday by concerns there would be a bullish surprise in the EIA report, such as an unexpected decline in inventories.

If we see that unexpected decline, then WTI should break $100.

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Last week, I noted that even though there was a very big surprise with respect to crude inventories, the market seemed slow to react. I indicated that it may have just been an artifact, and that was in fact what it turned out to be. I get my quotes from the NYMEX site, and those quotes are delayed by 15 minutes. So, no opportunities to make money as a result of a slow-moving market. Actually, I would have been stunned if traders weren’t poised to react to a large surprise in the report, but it seemed as if they weren’t. That’s why I posed the question.

In fact, someone posted a very interesting graph that suggests that in fact the movement in price happened prior to the release of the report:

December WTI Following Last Week’s TWIP Release

I know that graph is hard to read. Here is the link for the original graphic, in case you want to see the fine details. What it looks like is that about 4 minutes prior to the release of the inventory report, the price rapidly dropped over $1/bbl, implying that contracts were being dumped. This could of course be innocent; someone could have rolled the dice and guessed that the report would be bearish. That could also be due to the resolution on that graph (i.e., what you see above may have actually happened just after the report’s release).

But for a suspicious person like me, I started wondering about just how many people have access to this data. It would be very lucrative to sell some advance information, so I am curious as to how the EIA safeguards the early release of the numbers. How many people know the numbers before they are released? What safeguards exist to prevent someone from selling the information? Do any of the EIA’s employees drive a Ferrari? (kidding)

I asked Doug MacIntyre, author of This Week in Petroleum, if he could comment on this. Doug wrote:

Robert,

EIA understands completely the seriousness of our data and carefully safeguard it before it gets released. We know that a lot of money can be made if the data were known prematurely, and everyone involved is very careful not to divulge ANY information to ANYONE before the release. In fact, we even go a little farther and try not to comment on the data to the press until at least 1 hour after the data are released. I am confident that the data were not, and have not been compromised.

EIA will not discuss the specific procedures we do to safeguard the data or divulge the number of people that have access to the data, as we believe that any information regarding the procedures we follow should be safeguarded as much as the data.

Thanks for explaining that, Doug.