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By Robert Rapier on Apr 12, 2007 with no responses

This Week in Petroleum 4-11-07


Gasoline Inventories Are Plummeting

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.