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.

The Associated Press takes a question on oil and gas prices, and does a pretty good job explaining the factors affecting prices:

Ask AP: Your News Questions, Answered

Q: Background (my numbers maybe a little off, but you will see my point): About five years ago, oil sold for around $20 per barrel and gasoline was around $2 a gallon. Now oil is about $100 per barrel and gasoline is $3.25ish per gallon. Over the past five years, no new significant oil wells have come into production and no new refineries have come on line. So…

How can oil go up in cost by a factor of five and the cost of gasoline go up by a factor of two? We can only get so much gasoline out of a barrel of oil and our refining efficiency has not improved significantly. The math just does not make sense.

Richard Driscoll

Winnsboro, S.C.

___

A: Oil and gasoline prices often move in the same direction, but aren’t tied at the hip.

Oil prices fluctuate with production decisions from the Organization of Petroleum Exporting Countries, or when conflict in the Middle East or Nigeria threatens supplies. Increases or decreases in crude inventories, which come from imports and domestic production, also affect crude prices.

Gasoline prices are more closely tied to demand from U.S. drivers and how well refineries are doing producing gasoline. Falling production and inventories often send prices skyrocketing.

Lately, though oil prices have been at records, gas prices haven’t kept pace, and refiners’ margins have been squeezed. Refiners are making a far smaller profit now than they were in the spring, when gas prices were at records and oil was in the mid-$60s.

The refiners are limited by market forces in their ability to raise prices to try to maintain big profits. So when crude prices go way up, that doesn’t necessarily mean they can raise the prices they charge.

And to clear up those numbers a bit: About 5 years ago — in 2002 and 2003 — gas prices averaged $1.345 and $1.561 a gallon, respectively. Oil averaged $26.15 a barrel in 2002 and $30.99 in 2003.

Gasoline is now at $3.061 a gallon — up 128 percent from 2002 — and the recent record oil price of $100.09 was up 283 percent from the 2002 figure.

John Wilen

AP Energy and Transportation Writer

Now if the public and our elected leaders possessed the same understanding, we might start to get somewhere with our energy policy. As it stands, it seems that most people think prices are moved by the whims of Big Oil. There are entire organizations built around the theme that high gas prices are a result of oil companies increasing their profit margins. As I have stated previously, this has cause and effect reversed. With such a poor understanding of the industry, it is no wonder that we are subjected to nonsensical political rhetoric coming from the presidential candidates*.

* Mike Huckabee says “…we will achieve energy independence by the end of my second term. The Huckabee Administration will be remembered as the time when we finally, finally achieved energy independence.” To that I say that he is either completely deluded, ignorant about how much energy the U.S. actually uses, or is simply telling people what they want to hear. Then again, which president since Nixon didn’t make this promise? And have we grown more or less dependent during each successive administration?

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.

Time to debunk another perpetual myth. In a story today in CNN – Big Oil’s Money Machine – consumer advocate Tyson Slocum makes the following claim:

“Are we getting any bang for our buck with record gas prices?,” asked Tyson Slocum, energy program director at Public Citizen, a national consumer advocacy organization. “They aren’t building any new refineries. If they’re not going to translate the high prices into investment for the consumer, why should they be allowed to charge high prices?”

What is it with these consumer advocates and not being able to get their facts straight? Here are the facts for Mr. Slocum. According to the Oil and Gas Journal (OGJ) the oil industry invested $176 billion in capital expenditures in 2006, and is forecast to invest $183 billion in 2007. Those aren’t small potatoes. So, would Tyson Slocum like to respond to that?

Furthermore, it is much cheaper to expand existing capacity than to build new refineries. The API recently estimated that it costs about 60 percent as much to expand existing capacity as to build new capacity. And refiners are definitely investing in expansions. In just the past 10 years, refinery capacity has expanded by 2 million barrels per day. That is the equivalent of adding 1 decent-sized refinery each and every year for 10 years. You can verify those numbers for yourself right here.

So, Tyson Slocum, given that new capacity is being built and major investments are being made – directly contradicting your claims – would you care to retract? Looks like something is being done with those “high prices” after all.

In an update to Big Oil Buys Big Ethanol, it is official:

Valero Energy, the Oil Refiner, Wins an Auction for 7 Ethanol Plants

Valero Energy, the country’s largest independent refiner, said on Wednesday that it would buy seven ethanol plants from VeraSun Energy for $477 million, giving the biofuel industry a lift at a time when it is suffering from excess production capacity and falling gasoline consumption.

VeraSun, the nation’s second-largest ethanol producer after Archer Daniels Midland, filed for Chapter 11 bankruptcy protection last fall. Valero’s purchase signals important new support for a flagging industry from an unexpected quarter. In recent years, refiners have opposed Congressional mandates for refineries to blend increasing amounts of ethanol in gasoline, arguing that it made neither economic nor environmental sense.

So, for the price of $477 million, which would be less than 5 days of profit for someone like ExxonMobil, you can be the 2nd largest ethanol producer in the country. Even for Valero, $477 million is a piece of cake. Like I say, people who think the ethanol industry is a threat to the oil industry don’t understand the difference in scale between the two. If ethanol starts to look like a good business model, the oil industry will buy up the assets without breaking a sweat. The first salvo has been fired.

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.

———————-

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.

This morning, I read an interesting editorial in the Wall Street Journal:

Obama Has a Plan To Manage Our Oil Reserve

The editorial was written by John Shages, a former deputy assistant secretary for petroleum reserves at the Department of Energy. The editorial essentially argues that the composition of the Strategic Petroleum Reserve (SPR) is lighter than the composition of oil that most refineries run. Since lighter crude is also more expensive than heavier crude, Shages is suggesting that we sell some of the light crude and buy back some of the heavy crude. His argument – echoing the argument from Obama and various other government officials – is that this would generate cash and help drive down oil prices.

Some excerpts from the editorial:

Sen. Barack Obama is proposing a simple maneuver — called an exchange, or swap — that will help lower the price of oil for consumers, increase the amount of oil in the SPR, increase energy security, and leave taxpayers better off by about $1 billion. His proposal deserves to be adopted.

Today, with historically high oil prices, it is time to debate using the SPR. Some argue that the reserve should only be used in emergencies. Others say that we should use all the tools at our disposal to help consumers.

OK, let’s debate. Regular readers know that I strongly object to using the SPR in an attempt to influence prices. That is not what it is for. High prices – which are incidentally well off of their highs – do not constitute an emergency. Further, that line about taxpayers being better off by $1 billion misses a very large point. I could also trade in my house for a mobile home, and be better off by a few hundred thousand dollars. But that few hundred thousand has costs associated with it: Less home, a home that isn’t as safe in bad weather conditions, and a home that has less value when I wish to sell it. Likewise, there are costs associated with downgrading the quality of the SPR.

Mr. Shages continues:

The oil in the reserve now is all light crude, which is easier and cheaper to refine into gasoline, a reflection of refining capability at the time the SPR was created. Over the past three decades, however, U.S. refining capacity has become increasingly sophisticated and complex, because the world’s oil is increasingly heavy and harder to refine. Today, about 40% of our refining capacity is configured to handle heavier crude oil.

We now confront a mismatch between U.S. refining capacity and the oil mix in the SPR. In a 2007 report, the Government Accountability Office (GAO) found that in an emergency this mismatch could reduce U.S. refinery capacity by 5% or over 735,000 barrels per day in total as some refineries scale back production to accommodate the SPR oil. The GAO recommended that the Energy Department change the reserve’s oil mix to at least 10% heavy oil, roughly 70 million barrels.

It struck me as very odd that having oil that is too light could reduce refinery capacity. After all, light oil is much simpler to process – as is alluded to above. Yields are also higher. Yet the claim is that we would be better off with heavier oil in the SPR? This didn’t add up, so I dug up that GAO report that was referenced:

Improving the Cost-Effectiveness of Filling the Reserve

Some excerpts from that report:

Our analysis of DOE’s Energy Information Administration (EIA) data shows that, of the approximately 5.6 billion barrels of oil that U.S. refiners accepted in 2006, approximately 40 percent was heavier than that stored in the SPR.10 Refineries that process heavy oil cannot operate at normal capacity if they run lighter oils. For instance, DOE’s December 2005 found that the types of oil currently stored in the SPR would not be fully compatible with 36 of the 74 refineries considered vulnerable to supply disruptions. DOE estimated that if these 36 refineries had to use SPR oil, U.S. refining throughput would decrease by 735,000 barrels per day, or 5 percent, substantially reducing the effectiveness of the SPR during an oil disruption, especially if the disruption involved heavy oil.

If you know what the assays look like for heavy oil versus light oil (See The Assay Essay), this looks like a very improbable claim. I suppose if you didn’t try to optimize your refinery for light oil, then that might be a true statement. But refiners optimize their refineries on a daily basis. I used to work in a heavy oil refinery. We could run heavy oil through, or we could run light oil through. If we don’t change the refinery settings at all, and run light oil through, then the above argument may be correct. But we would never do that. The overall yields are in fact higher with the lighter crudes, but you have to make the necessary adjustments. You may end up shutting down some units – like cokers – that are designed to handle heavy crudes.

But there is a more significant factor that seems to be overlooked. Refiners are configured to run heavy crudes because they are cheaper. Why are they cheaper? One, because they are more readily available. What does that suggest? That it is much less likely that there would be a disruption of heavy crude supplies. Thus, Mr. Shages (and Obama’s) argument is based solely on what refiners typically run, and ignores the question of typical availability of supply.

In conclusion, a heavy oil refinery can run light crudes with some adjustments. A light oil refinery can’t run heavy oils without severely impacting yields. Further, a light oil refinery is much more likely to see supply disruptions because there is simply less light oil available. This is why swapping heavy oil for light oil is a bad idea. It is a misguided attempt to influence oil prices, and that is not the purpose of the SPR. If it is allowed to be used for this purpose, then all we are doing is speculating with the reserve.

Footnote: Headed back to Europe today; offline for a couple of days.

2nd Update

Crude was down sharply following today’s release. The AP explains:

NEW YORK (AP) — Oil’s rise to $100 a barrel, which seemed a done deal as recently as two days ago, was dealt a severe blow Wednesday when the government reported an increase in supplies at the Nymex delivery terminal in Cushing, Okla., which is closely watched by traders as a benchmark of oil inventory tightness.

Overall crude supplies fell during the week ended Nov. 23 by 400,000 barrels, in line with the 500,000 barrel decrease analysts had expected. But that decline was overshadowed by a 600,000 barrel increase in inventories in Cushing, Okla. Cushing inventories are up 13.4 percent in two weeks.

Activity at the Cushing terminal is studied closely by oil traders because it is the physical delivery point for Nymex crude. Falling supplies there are seen as a symptom of a tight market, and those concerns ease when Cushing inventories rise.

At this point, I think the only chance oil has of reaching $100 this year is if OPEC comes out of the meeting next week and really spooks the market. Of course every time I say that, oil runs up $8. But I do expect it to drop into the $80’s pretty soon.

Updated following the release

Crude inventories fell less than expected, but mostly in line with expectations. Refinery utilization is picking back up. The one thing to note is that crude imports are now up over the same period last year, and with the reports of more OPEC shipments headed this way, this trend is likely to continue. This is the first time in a long while that I recall imports being up year over year.

Summary of Weekly Petroleum Data for the Week Ending November 23, 2007

Some excerpts:

U.S. crude oil refinery inputs averaged nearly 15.5 million barrels per day during the week ending November 23, up 573,000 barrels per day from the previous week’s average. Refineries operated at 89.4 percent of their operable capacity last week.

U.S. crude oil imports averaged nearly 10.4 million barrels per day last week, up 534,000 barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged 10.1 million barrels per day, or 144,000 barrels per day more than averaged over the same four-week period last year.

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) dropped by 0.4 million barrels compared to the previous week. At 313.2 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 1.4 million barrels last week, and are below the lower end of the average range.

Nothing earth-shattering in this report. I think now it’s a waiting game until OPEC’s meeting next week.

————————————

Here is the expectation for this week’s report:

NEW YORK (Reuters) – U.S. crude oil stocks probably fell last week on lower imports, a preliminary Reuters poll of nine industry analysts showed on Monday.

Analysts called for an average draw of 800,000 barrels for crude oil stocks, a 1.4 million barrel drop in distillates, which include heating oil and diesel fuel, and a 1.0 million barrel increase in gasoline stocks.

However, the estimates were all over the place:

Phil Flynn of Alaron Trading in Chicago, however, predicted that crude stocks rose on higher imports. Crude imports had fallen 667,000 barrels per day to 9.8 million bpd in the week to Nov. 16.

Imports last week could have fallen about 300,000 bpd to 9.5 million bpd, according to an estimate by Tim Evans, analyst at Citigroup Global Markets in New York.

But Peter Beutel, president of Cameron Hanover in New Canaan, Connecticut, estimated crude imports could have risen between 250,000 to 750,000 bpd last week.

Generally, you would expect that a draw this week should push prices back toward $100. However, there are other factors pulling crude in the other direction. Given that one of the major factors that pushed oil up has been a widely held belief that OPEC had nothing more to give (or couldn’t back up their promised 500,000 bpd increase), news like this should give traders pause in the short term:

OPEC oil exports, excluding Angola, will rise by 720,000 barrels per day (bpd) in the four weeks to December 8, according to Roy Mason of tanker tracker Oil Movements.

The increase will be the biggest this year, with most of the extra supply heading to Western refiners. Mason estimated that seaborne exports from the 11 OPEC countries would rise to 24.54 million bpd from 23.82 million bpd to November 10.

Based on these observations, I think it is very likely that a new all-liquids peak will be set in November. In fact the IEA’s new production numbers for October (the full report is now available for free) show a (preliminary) new record. The total liquids production rate in October was reported to be 86.43 million bpd (see Table 3). That is up almost 2 million bpd over August, and 300,000 bpd above the previous July 2006 record of 86.13 million bpd (thanks to Stuart Staniford for providing that number). The IEA doesn’t break out just crude + condensate, but with all-liquids in that neighborhood, C+C should be near record territory as well.

The other big question is the upcoming OPEC meeting. All year I have been in the (lonely) camp that OPEC is setting on some spare capacity. I think that question has been answered, although they were certainly slow to open the taps. The questions now are 1). How much more capacity do they have?; and 2). Can Saudi get the production increase that they reportedly desire? I think there is a lot of risk out there for short-term bulls. Supply appears to be increasing, there are projections that demand will soften at these prices, and OPEC is about to discuss another production increase.

Yesterday’s OPIS Report also had a blurb on this:

The list of market watchers predicting $100/bbl oil is growing, putting more pressure on OPEC to boost production at its Dec. 5 meeting. “The market is still not pricing in production increases. I would have thought today would have been a little more give-back,” said one trader who expects OPEC will boost supply.

Oil has certainly run up higher than I thought it would this year. However, the factors that helped with the price run-up are starting to shift. The long-term bullish factors remain. Short-term, I would heed the signs pointing to a more favorable supply/demand situation.

This story baffles me.

High fuel prices are puzzling

The middlemen who buy and sell fuel on the wholesale market have seen Los Angeles gasoline prices plunge more than 50 cents in the last two weeks.

Too bad drivers aren’t seeing the full benefit at the pump.

On Friday, the most recent trading day, the wholesale gasoline price in Los Angeles hovered around $2.17 a gallon — a figure roughly equal to a retail price of $2.77 a gallon after taxes and other costs were included.

OK, let’s set the scene. The wholesale market would be where refiners sell their fuel to jobbers and such. The jobbers then turn around and sell the fuel to gas stations. Now here is where the story gets bizarre:

But on Monday, service stations in the city were selling self-serve regular for an average of $3.221 a gallon. Consumer advocates and others smell a rip-off. As proof, they note that a few California refiners have reacted by cutting production, shutting down early for maintenance and lining up exports in an effort to shore up wholesale prices.

“The California economy has been penalized by high gas prices for months, and now, when the opportunity comes for a brief window of significantly lower prices, the workings of the market are being frustrated,” energy economist Philip K. Verleger Jr. said. “The people who own refineries are doing everything they can to prevent [the declining wholesale price] from trickling down to the consumer.”

Now hold on a second. Didn’t the story just say that wholesale prices had plunged? Refiners don’t own the gas stations (less than 5% of the retail gas stations are owned by major oil companies). I am surprised that someone like Philip K. Verleger would make such an uninformed statement. Refinery margins have been horrible for several months now. Why on earth wouldn’t they shut down early for maintenance, or find export outlets?

For crying out loud, Verleger is supposed to be an economist. The fact is, refiners have not been successful at keeping wholesale prices up – the wholesale price has plunged. So tell me, how exactly are the refiners culpable here for the high retail prices, when they are selling their product at a low wholesale price? Maybe Verleger was misquoted. That’s the only explanation I can come up with for what seems like a serious misunderstanding of who benefits when wholesale prices are low and retail prices are high.

With all of the traveling, and then trying to catch up after the holidays, I haven’t had time to do a proper TWIP. Anyway, mostly what we saw for the past month were crude draws, and gasoline inventories climbing back up and getting in pretty good shape prior to spring turnaround season. Part of the draw down in crude was tax-related. Many countries, including the U.S., tax crude inventories at year end. So, there is a bit of a balancing act as refiners try to draw down inventories while still maintaining enough on hand to weather any supply disruptions.

This week saw a large gain across the complex, and crude prices are falling as a result.

Summary of Weekly Petroleum Data for the Week Ending January 11, 2008

Some highlights:

U.S. crude oil refinery inputs averaged nearly 15.0 million barrels per day during the week ending January 11, down 760,000 barrels per day from the previous week’s average. Refineries operated at 87.1 percent of their operable capacity last week.

U.S. crude oil imports averaged 10.4 million barrels per day last week, up 583,000 barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged 10.0 million barrels per day, or 219,000 barrels per day more than averaged over the same four-week period last year.

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) rose by 4.3 million barrels compared to the previous week. At 287.1 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 2.2 million barrels last week, and are near the upper limit of the average range. Total commercial petroleum inventories increased by 3.6 million barrels last week, and are in the middle of the average range for this time of year.

CNN’s take:

Oil below $90 on surprise supply increase

NEW YORK (CNNMoney.com) — Oil prices fell sharply Wednesday after the government reported a surprise increase in crude supplies.

U.S. light crude for February delivery fell $2.20 to $89.62 a barrel on the New York Mercantile Exchange. Oil had traded down $1.21 prior to the report’s release.

In its weekly inventory report, the U.S. Energy Information Administration said crude stocks grew by 4.3 million barrels last week, after posting declines for eight weeks in a row. Analysts were looking for a drop of 300,000 barrels according to a Dow Jones poll.

“The market looked at the report as bearish, given the increase in crude stocks,” said Andrew Lebow, a broker at MF Global in New York.

My take: As we move into refinery turnaround season from late February through April, we should see crude inventories start to build, and gasoline inventories should get pulled down. That should start a run toward $4 gasoline.