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By Robert Rapier on Nov 15, 2006 with no responses

This Week in Petroleum 11-15-06

The weekly inventory report from the Energy Information Administration came out today, and it provided support for my latest essay. You can read the report at: This Week in Petroleum. A quick look at the gasoline inventory graph can tell you that upward pressure on gas prices is imminent:

In my previous essay, I argued that falling inventories had to cause prices to increase. Some excerpts from this week’s report:

…inventories dropping much faster than normal for this time of year. Moreover, with demand higher than in recent years, stocks considered in terms of the days of supply (or demand) that inventories can cover are lower than they appear on an absolute basis. This interpretation would lead one to think that markets are tightening and that oil prices could be poised to head higher soon.

On distillate (diesel, jet fuel, fuel oil) inventories:

There has also been discussion among analysts lately about the level of demand, particularly for distillate fuel. Over the most recent four weeks, demand for distillate fuel oil (which includes both heating oil and diesel fuel) is averaging nearly 4.5 million barrels per day, the sixth highest four-week average ever, and the highest four-week average ever for any period that doesn’t include weeks in January or February, when cold weather usually leads to a peak in distillate fuel demand.

Of course the high demand for distillate has already caused the spread between diesel and gasoline to become unusually large.

From the text version released earlier in the day:

Total motor gasoline inventories dropped by 3.7 million barrels last week, and are now in the lower half of the average range.

This was a much higher draw down of gasoline than was forecast. 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.

Finally, on gasoline prices, they have started creeping up, which if you have been watching inventories is no surprise:

The U.S. average retail price for regular gasoline rose 3.2 cents to 223.2 cents per gallon as of November 13th, 6.4 cents per gallon lower than at this time last year. East Coast prices rose 2.8 cents to 219.8 cents per gallon. In the Midwest, prices rose 3.8 cents to 221.8 cents per gallon. Gulf Coast prices were up 2.9 cents to 210.9 cents per gallon. The West Coast saw the largest regional increase, with prices rising 5.7 cents to 243.8 cents per gallon. The only region that saw a price decrease was the Rocky Mountains, with prices falling 2.0 cents to 225.4 cents per gallon.

My prediction is that the drop in gasoline inventories will slow next week, as refineries begin to come out of their turnarounds, and creeping prices start to slow demand a bit. If not, I expect prices to turn up sharply in the near future.