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.

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.

———————-

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.

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.

Update following the release:

Big surprises all around this week:

Summary of Weekly Petroleum Data for the Week Ending November 30, 2007

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) dropped by 8.0 million barrels compared to the previous week. At 305.2 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 4.0 million barrels last week, and are below the lower end of the average range. Both finished gasoline inventories and gasoline blending components inventories increased during this period. Distillate fuel inventories increased by 1.4 million barrels, but are in the middle of the average range for this time of year. propane/propylene inventories decreased by 0.5 million barrels last week. Total commercial petroleum inventories decreased by 3.8 million barrels last week, and are in the upper middle of the average range for this time of year.

U.S. crude oil imports averaged nearly 9.4 million barrels per day last week, down 980,000 barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged 10.0 million barrels per day, or 121 thousand 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 nearly 1.2 million barrels per day. Distillate fuel imports averaged 299,000 barrels per day last week.

I don’t recall ever seeing a crude inventory drop that large. If I had a little more time today, I would check the history, but that drop should certainly rank up there among the biggest. (Note: I did go back and check, and there was a drop of just over 8 million barrels in the 2nd week of December last year).

Interestingly, the markets aren’t reacting much to this drop, or to the news from OPEC suggesting that they won’t increase output. The inventory news is offset a bit by the fact that there was a gain at Cushing, but you would think this combination of news would put oil back up over $90. The price briefly popped up above $90, but as I write this, oil has dropped back to $88.72. A month ago, it seemed like every bit of news drove prices higher, but it now looks like we are operating in a different environment.

———————–

What a volatile week it’s been. In last week’s TWIP, with oil trading in the mid-$90’s, I wrote that I expected it to drop back into the $80’s soon. Following last week’s inventory report, WTI did take a dive, but then a pipeline explosion in Minnesota - in which two people were killed – drove prices right back over $95. But the price could not be sustained, and signs of increasing supplies and softening demand, coupled with the possibility that OPEC would bump up production at their December 5th meeting, resulted in a drop into the $80’s by the end of the week. This was the steepest weekly decline in more than two years.

Will They or Won’t They?

Overshadowing this week’s inventory report is the OPEC meeting on December 5th. There have been so many conflicting statements – at times even originating from the same country – that it is hard to determine whether members will agree to increase production rates beyond the current quotas.

At one point Saudi oil minister Ali al-Naimi said “There is absolutely ample supply.” At another time, he said that “the field is wide open” regarding the possibility of an increase. Here are some excerpts from a couple of news stories on the upcoming meeting:

Oil Prices Edge Up Ahead of OPEC Meeting

Prices rose and fell throughout the day as differing statements were reported from delegates of the Organization of Petroleum Exporting Countries arriving in Abu Dhabi, United Arab Emirates, for Wednesday’s meeting.

Oil prices have dropped about $10 in one week on the belief that OPEC has all but decided to boost production. But the price drop itself has raised questions about whether oil ministers will follow through.

Recent OPEC comments have been divided, with ministers from Venezuela and Qatar suggesting there’s no need to boost supplies, while ministers from Indonesia, Nigeria and Kuwait say they’re still open to increases.

Saudi Oil Minister Ali al-Naimi, possibly the most influential member of the cartel, has struck a neutral tone, telling reporters this weekend that “the field is wide open.”

Another article offered up predictions by analysts not only of the inventory report, but also of whether OPEC would increase production:

Oil rises, ends slide as OPEC hike seen unlikely

A Reuters poll of 23 banks, traders and funds on Monday showed 12 participants did not expect OPEC to raise output. Late last week, a similar poll had 18 out of 24 participants expecting an increase of around 500,000 barrels per day.

A poll of analysts by Reuters ahead of U.S. inventory data to be released on Wednesday showed crude stockpiles likely fell 800,000 barrels in the week to Nov. 30 due to the pipeline disruption. Distillate stocks were seen down 300,000 barrels and gasoline inventories up 1.3 million barrels.

It’s funny how perception drives oil prices. A pipeline blows up, traders perceive a shortage, and the price spikes. Then, perceptions that OPEC will boost supplies drive prices back down. And the irony of course is that the pressure on OPEC to boost production is easing as prices fall – yet prices are falling because they are expected to boost production. That makes it hard to predict how strongly the market is going to react if they don’t.

But at this point it appears that most members have come out against a production increase. If they decide against an increase, and the Fed cuts interest rates in a few days, we may yet make another run at $100 before the year is out.

Upcoming EIA Conference

Doug MacIntyre of the EIA dropped a note to inform us of an upcoming EIA conference on important energy issues. Doug was the former author of TWIP, and is now heading the division that does the EIA’s Short-Term Energy Outlook.

Robert,

Since this blog item is about the data EIA puts out every week, I hope you and your readers don’t mind if I plug an EIA Conference that will be held in Washington, DC on April 7-8. Session topics are varied, but include Peak Oil and other topics your readership might be interested in. The conference itself is free and has some very big names that have already agreed to be speakers. For more info, go to:

http://www.eia.doe.gov/eia_conference_2008.html

Doug MacIntyre, EIA

Right now, I am scheduled to be in the U.S. during the first part of April, and I am hopeful that I can attend.

I don’t think I have ever seen the forecasters miss the estimate this badly. They were forecasting a 300,000 barrel decline in gasoline stocks, and instead got a 5 million barrel decline. For the first time in a long time, inventories are now in the lower half of the normal range.

Summary of Weekly Petroleum Data for the Week Ending March 30, 2007

Here was CNN’s take on it:

Oil prices swing wildly on Iran, gasoline

In its report, the Energy Information Administration said gasoline stocks, closely watched ahead of the summer driving season, plummeted by 5 million barrels. Analysts were looking for a small drop of just 300,000 barrels, according to Reuters. The fall in gasoline supplies pushed gasoline stocks to the lower end of their average range, the first time in several months the supplies have dipped below average.

One analyst noted that the Iran situation had pushed up oil prices $2 to $3 over the last couple of weeks, and credited the big fall in gas stocks with preventing a similar selloff.

“We’re nowhere near where we should be in terms of inventories,” said John Kilduff, an energy analyst at Fimat in New York, who also pointed to strong gasoline demand numbers in the report. “We’re seeing the kind of numbers we only see during the peak summer season.”

Kilduff also noted the relatively low rate of refinery operation, which EIA said was at 87 percent capacity last week.

“The failure of the refinery rate to go to 90 percent is spelling lots of trouble for us,” he said.

Crude inventories were up more than expected, and crude imports are running at a higher level than at this time 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 332.7 million barrels, U.S. crude oil inventories are above the upper end of the average range for this time of year.

U.S. crude oil imports averaged over 10.2 million barrels per day last week, up 613,000 barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged over 10.0 million barrels per day, or 196,000 barrels per day more than averaged over the same four-week period last year.

If gasoline inventories don’t turn upward within the next week or so, expect to see them make another strong run past $3.00/gallon.

Just a quick update on the highlights of the weekly EIA report:

U.S. crude oil refinery inputs averaged over 15.8 million barrels per day during the week ending July 20, up 172,000 barrels per day from the previous week’s average and the highest average since the week ending September 22, 2006. Refineries operated at 91.7 percent of their operable capacity last week.

Utilization is creeping back up, but still a good 5 percentage points short of where it normally is this time of year.

U.S. crude oil imports averaged nearly 10.4 million barrels per day last week, up 3,000 barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged nearly 10.4 million barrels per day, or 66,000 barrels per day more than averaged over the same four-week period last year.

Oil imports are not quite in record territory, but remain strong.

Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged nearly 1.7 million barrels per day, the highest weekly average ever.

Wow! I just wonder if this isn’t an accounting artifact after last week’s inventory numbers came in really low.

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) declined by 1.1 million barrels compared to the previous week. However, at 351.0 million barrels, U.S. crude oil inventories remain well above the upper end of the average range for this time of year. Total motor gasoline inventories increased by 0.8 million barrels last week, but remain below the lower end of the average range.

Now, imagine that without record gasoline imports and you can see why imports have really kept us out of trouble this year (not that we are out of the woods yet).

Over the last four weeks, motor gasoline demand has averaged nearly 9.7 million barrels per day, or 1.2 percent above the same period last year. Distillate fuel demand has averaged nearly 4.1 million barrels per day over the last four weeks, up 2.8 percent compared to the same period last year. Jet fuel demand is down 3.0 percent over the last four weeks compared to the same four-week period last year.

I continue to be amazed that these gasoline prices have not impacted demand.

I spent a little while trying to resolve an apparent discrepancy in This Week in Petroleum. The report shows OECD oil stocks near the bottom of the average range. I watch this pretty closely, and I was sure they were in the middle of the range. That’s why I have been saying that Saudi can still rightly say that inventories are OK, therefore there is no need to increase production. But then I finally read for comprehension and noticed that the graph was only for OECD Pacific stocks. These are indeed close to the bottom of the range. Of course this is where Saudi has been enforcing a lot of their production cuts, so they may indeed soon have to open the taps (if they can), especially if oil prices continue to test $80/bbl.

Update:

This week’s report highlights:

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 0.7 million barrels compared to the previous week. At 333.4 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 fell by 5.5 million barrels last week, and are just below the lower end of the average range. Distillate fuel inventories inched higher by 0.1 million barrels, and are slightly above the upper end of the average range for this time of year.

U.S. crude oil imports averaged 9.8 million barrels per day last week, down 441,000 barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged over 10.0 million barrels per day, or 202,000 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 953,000 barrels per day. Distillate fuel imports averaged 259,000 barrels per day last week.

That’s another unexpectedly large draw on gasoline stocks, and the second week in a row that the estimate was badly missed by the analysts. Expect gasoline prices to continue rising. However, I would expect this plunging inventory situation to reverse within 1 to 2 weeks.

What’s Driving Prices?

If you follow the petroleum markets, or you just want to know what is going on in the world of energy, the weekly report from the Energy Information Administration (EIA) is invaluable. Every Wednesday the EIA releases a report detailing information on petroleum and product inventory levels, imports, prices, refinery utilization, etc. For those who follow this information, the recent run-up in prices is not a surprise, as you would have seen it coming. It is not driven – as some have insisted – by a renewed willingness on the part of oil companies to gouge consumers. (It is still hard for me to believe that intelligent people can believe things like that). No, the graph of gasoline stocks shows why gas prices have risen.

Note the gasoline inventory trend over the past year. If I plotted price on top of that, you would see a very strong inverse correlation between price and inventory level. If inventories are falling fast, as they have been recently, price will rise fast. And price will continue to rise as long as inventory levels are plunging. “Supply and demand” is not just a cliché. It is a predictor of trends. And while gasoline inventories are not yet in terrible shape, if they fall for another week or two they will be in danger of dropping below the normal range – just as we head into high-demand season. Also, while inventories do tend to fall at this time of year, the steepness of the plunge this year is unusual, and is the primary driver in the recent rise in gasoline prices.

Inventory Levels

The next obvious question then is, “Why are inventory levels falling?” As you saw in my previous essay, the FTCR, an organization who thinks $2.00/gallon gasoline is a consumer right (!), asserts that refiners are purposely keeping inventory levels low by withholding capacity. They have put out 2 news releases in the last couple of days making that accusation, which included (both times) the illogical leap that lower capacity = deliberate restriction.

However, as I pointed out in the previous essay, not only is overall refining capacity up on the West Coast, it is up across the U.S. The problem is that demand is increasing so fast that excess capacity has been eroded. Ten years ago, if a refinery went offline for maintenance, there was enough spare capacity that there was no real impact on the market. That is no longer the case. So, that leaves 2 options for addressing the increasing demand: Higher prices or rationing. Which do you prefer?

This Week in Petroleum

The links you want to bookmark, if you really want to be more informed about what’s happening in the world of energy, are:

Text File of Highlights

This is the first report to come out. It is released at 10:30 a.m. EST each Wednesday. This is a text file that provides all of the important details, although without the graphics. But it is a link that I typically click into within 5 minutes of the release of the report each week.

The second link that I read every Wednesday is:

This Week in Petroleum:

This is a comprehensive and graphical look at the trends and developments. I pulled the graph above from this week’s report. The report is released at 1 p.m. EST (and the author of that report has dropped by this blog and commented before).

This Week’s Predictions

Often you can find the analyst’s predictions of what the report will contain. Sometimes they will miss badly, as they did last week. Here is what they are predicting for this week:

Analysts surveyed by Dow Jones Newswires expect gasoline inventories to have dropped by an average of 1.3 million barrels last week from the previous week. Analysts are also calling for a 900,000 barrel decline in distillate stockpiles — which include diesel fuel and heating oil — and a build of 1.6 million barrels in crude oil supplies.

I will update this when the report is released. It was at this point last year that refineries began to come out of their turnarounds and gasoline finally reversed the declines. I expect that to happen within the next couple of weeks. Imports will also be key. Gasoline imports have been high as prices have risen, and as long as they continue to arrive it will take some pressure off of prices.

Updated: You would think if last week’s large inventory drop was due to fog-induced delays, all of that crude would show up this week. Not so, as another drop in crude inventories was recorded:

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) dropped by 0.7 million barrels compared to the previous week. At 304.5 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 1.6 million barrels last week, but are near the lower end of the average range. Both finished gasoline inventories and gasoline blending components inventories increased during this period. Distillate fuel inventories decreased by 0.8 million barrels, but are in the lower half of the average range for this time of year.

If gasoline inventories continue to improve, we may yet avoid $4 gasoline in the spring. But I still wouldn’t count on it. More from the report:

U.S. crude oil imports averaged nearly 10.1 million barrels per day last week, up 689,000 barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged 9.9 million barrels per day, or 86 thousand barrels per day more than averaged over the same four-week period last year.

Well, on the other hand the sharp rise in crude imports would tend to support the fog story. Refinery utilization fell, which would help keep crude inventories up, but lower gasoline inventories:

U.S. crude oil refinery inputs averaged nearly 15.3 million barrels per day during the week ending December 7, down 172,000 barrels per day from the previous week’s average. Refineries operated at 88.8 percent of their operable capacity last week. Gasoline production moved higher compared to the previous week, averaging nearly 9.2 million barrels per day. Distillate fuel production fell last week, averaging 4.2 million barrels per day.

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Just as last week’s report was largely overshadowed by the OPEC meeting, this week’s report will come on the heels of the Fed’s announcement on interest rates. (Update: The Fed cut interest rates by a quarter point). Here are the expectations:

U.S. gasoline stockpiles probably rose for a fifth time last week, gaining 1.5 million barrels, based on the median estimate of 10 analysts surveyed by Bloomberg.

Supplies of distillates probably climbed 500,000 barrels, their second gain, while crude oil inventories probably rose 50,000 barrels after dropping 7.9 million barrels a week earlier when the Houston Ship Channel was shut by fog.

Investors will be more focused on the Fed announcement, Excel’s Waggoner said. While a quarter-point cut is a “foregone conclusion” there is a chance the bank may lower rates by a half point, which would weaken the dollar and may slow the decline in oil prices, he said.

I think that if the reason for last week’s large decline in crude inventories was due to delayed offloading of shipments because of the fog, we will probably see a larger increase than 50,000 barrels of crude this week.

However, next week’s report should be interesting, because on Monday an ice storm shut down the terminal at Cushing, Oklahoma – the delivery point for NYMEX crude:

NEW YORK, Dec 11 (Reuters) – The largest crude oil terminal at the delivery point for NYMEX crude oil futures at Cushing, Oklahoma, and two major pipelines at the hub were still shut Tuesday after an ice storm hit the area Monday, a spokesman for the terminal said.

Enbridge Energy Partners LP’s 16.7 million barrel crude oil terminal and the Spearhead and Ozark crude oil pipelines operated by parent company Enbridge Inc were shut Monday, Enbridge spokesman Larry Springer said.

“They went down about 1:00 (Central Time),” said Springer.

Spearhead transports 125,000 barrels per day (bpd) of crude oil from the Chicago area to Cushing. The Ozark line can carry approximately 200,000 bpd from Cushing to Wood River in southern Illinois.

Springer said that the crude oil terminal at the Cushing was also closed due to power outages.

I am all too familiar with the devastation that can be caused by Oklahoma ice storms. I have been through a couple of bad ones. Oil futures are rallying on the news.

Note: As I mentioned a couple of days ago, this is likely to be the last TWIP update from me for the next four weeks.