Regular readers of this blog know that the safest way to describe the oil market includes emphasizing its bipolar nature. But even this veteran reporter is surprised by the multiple personalities that have become manifest at mid-Summer. It’s rare that one sees the gasoline market in a depressive phase, while crude oil is in the last throes of a manic mood.
Wednesday was a classic “Sell the News” day in the futures’ markets. The Department of Energy’s weekly statistical bulletin sported a 6.5-million barrel decline in U.S. crude oil inventories. For those prone to shallow analysis, that might appear bullish and the data initially sparked a rally. The brief but dramatic buying spree brought WTI crude futures to an all time intraday high of $78.70 per barrel, or just above $1.87 gal for the raw feedstock from which refinery Rumplestilskins make gasoline gold.
But the trading community -- in full thundering herd mode -- - had an epiphany around midday, and it was in relative accord with what I have been suggesting recently; namely, that the myth of refiners not up to the task of meeting U.S. fuel demand has been dispelled. Crude oil stocks are declining, because refinery margins have plummeted, and it is no longer a “no-brainer” to purchase crude with abandon. And, the end of the Summer supply crunch time for gasoline is about 30 days away.
When the dust settled today, crude oil was down nearly $1.70 bbl and wholesale gasoline prices were down about 7-8cts gal in most bulk markets. Nationwide pump price averages of $2.867 gal (see www.fuelgaugereport.com for details) should still drift lower, although August has the potential to deliver dramatic shifts (see Katrina, 2005).
From Riches to Rags . .
As Mr. T might say, “pity the fool” who bought gasoline when it fetched a price that was $30-$45 bbl over the price of crude. (Mr. T is a commodities’ expert by virtue of his expertise in gold).
Those days of renaissance margins occurred less than three weeks ago. Thanks mostly to the manic increases prior to today, but also to the depressive decreases for most gasoline markets, the difference between the price of crude and the price of gasoline continues to narrow. Gulf Coast refiners who could sell their gasoline for $35 bbl over the price of crude can now barely get $6 bbl margins. West Coast refiners who briefly saw Spring gasoline sell for $50 bbl over the price of crude now can only retrieve a gross margin of about $15 bbl.
We need not recruit Michael Jackson, Lionel Ritchie, Willie Nelson and Bob Geldof for a “refinery-aid” concert any time soon, however. They had an incredibly prosperous run, and they will see some better margins as tropical waves, depressions, storms, and hurricanes develop or threaten us in the next 30 days. But we can throw out the “$4.00 gal is a certainty” statements, and the press should take those mavens to task for their irresponsible predictions.
Some other comments on today’s DOE report
This morning’s government data shows the highest nationwide output levels for U.S. refining since the week before Hurricane Katrina hit in August 2006. And Gulf Coast refiners are able to squeeze out more refined products from every bbl, although that squeezing process is nowhere near as profitable as it was one month ago.
Refiners ran 16.331-million barrels per day of crude and various feedstocks last week, a 342,000 barrel/day increase on the week and a sign that save for some Midwestern plants, U.S. operations are about as healthy as they can be. The Gulf Coast is a clear standout. Runs there advanced by 234,000 bbl/day last week and the region manufactured a record 3.5-million bbl/day of gasoline, up 115,000 bbl/day on the week. Output may even advance a bit further some two weeks from now when refiners begin producing more volatile (and slightly cheaper-to-make) blends for the Autumn.
Crude stocks dropped by 6.5-million bbl last week and nearly 4-million bbl of that decline was at the Gulf Coast. Hand-to-mouth purchasing strategies make sense in light of diminishing margins, so drawdowns in crude may be related to economics and not to some premature tightening of global supply.
The nationwide gasoline output level was an all time record 9.429-million bbl/day, rising 158,000 bbl/day from last year. In addition to the Gulf surge, very high output was witnessed on the West Coast, and further increases are forthcoming as Chevron’s El Segundo refinery gets back to normal.
Gasoline demand drifted down for a second consecutive week, with DOE suggesting that 9.662-million bbl/day of motor fuel was used. The four week average “lift” versus last year is 1.9 percent, but there is concern that the apex of Summer demand was reached in previous July reports where motorists used more than 9.7-million bbl/day of gas.
A longer term perspective . . .
When you plug in recent demand and today’s prices, Americans are using nearly 406-million gallons per day of gasoline, and paying a collective $1.16-billion for the fuel.
That compares with a figure of $1.225-billion on this date last year. Also, we have not seen a day where we meted out less than a billion bucks for gasoline since the first weekend of April 2007.
In 2005, we were more frugal, or less excessive and paid about $909-million for our August 1 needs. In 2004, the number was $750-million and the bill was $595-million in 2003 and $551-million in 2002.
So far in 2007, we have seen crude oil prices vary from a late January low of $49.90 bbl (for West Texas Intermediate crude futures) to the brief all time high of $78.70 per barrel witnessed this morning.
Those are bipolar swings that make Sybil look flat-out stable.
A Personal Footnote: I did several radio interviews today, even though doing frequent radio hits is risky, since the audience will immediately assume that I am not good-looking.
In two cases, I was asked by a qualified interviewer how I could possibly have a temperate outlook on crude and fuel prices when “everyone else” was so bullish?
The answer is the same as always. Most of the talking heads on TV and the audible voices on the air waves have a vested interest in the outcome. I do not. My money is tied up in things like my daughter’s education at NYU. If you think that oil prices are high, I would invite you to view the statements from the office of the university bursar (if you are over 40 and have children, familiarize yourself with that term).
The press tends to demonize executives throughout the petroleum chain. How about scrutinizing (and perhaps, even demonizing) those responsible for the never-bipolar and always-manic world of college tuition. The office of the bursar treats me like Josef Stalin treated his enemies, and make oil execs look like Mr. Rogers.
Vent, vent.