http://www.bloomberg.com/apps/news?pid=20601082&sid=aHqIQiPbdB.E&refer=canada

Well, this should be interesting. They must be seeing a lot lower refinery production, coupled with a decrease in crude oil imports. We will have a test of prognosticating ability this week for once.



Particularly so, if there is truly 120 million barrels floating around the world in tankers at the moment.

Whats interesting is if you go back in time to 2004-2005 the US reported a steady build in stocks as oil prices steadily rose.



This is not the first time that rising US inventories and oil prices moved in the same general direction. Starting to look like a back to the future market. And also as in 2005 oil inventories rose right through Hurricane Katrina with no obvious effect on inventory levels. Although prices began to rise strongly.

I'd suggest that at the moment that the combination of rising inventory and poor economic data is acting as a real damper on oil prices despite the slow rise. I'm really interested to see if we can get a case of continued weak economic data and falling oil inventories. If we get a bunch of good news on the economic front then we loose the chance to see how oil prices respond with falling oil inventories and a poor economy. This is the general case one would expect at some point in the future when the economy is tightly constrained by oil availability.

Do oil prices actually rise strongly does demand drop and price level or fall ?

Maybe we get a bit of a foretaste of the future over the next several months.

Here are some graphs for you.

When I was a young man working in the giant factory, analyzing production data, they taught us to look at graphs like Memmel's above, and ask questions: In that one, all I can see is that the system was running in a kind of methodical way up until early in 1995, at which time something happened, and inventory drew way down, and there was a similar period, in early 1999, when basically the same thing happened.

So what happened?

I went back to the pricing graph and the GDP graph for those two time periods, which I have posted above, to try to figure it out.

I have to say that in the 1994-95 case, it is pretty clear that there was a period in late 1994 when oil price went down to 14 and stayed there, so maybe it is nothing more or less than "capitulation", which is, the price stayed so low, for so long, that people just gave up... Perhaps if we were to go back and look, we would see that right about that time OPEC gave up and finally cut back on production.

In early-to-mid 1999, there was a period of exactly the same thing... the price stayed at about 11 for a few months, at which time, the producers evidently got sick of it.

The GDP during those periods also set back a little bit... in early 1995 we went from 5% to roughly zero GDP growth, and in 1999, we went from 7% to about 1% growth when that price signal finally happened.

So, maybe OPEC really is smart enough to cut back on production when they get a solid enough pricing signal, and when they finally think that the US GDP has hit a soft spot.

The argument can be made that they are just a little late in finding the pricing signal in this case, or we are still working through the inventory we generated last summer when the price was 147....

but you have to think that there is an excellent chance that the inventory will be about 20% lower in about 9 months, if the market feels that the price has finally bottomed out, and also, when the tea leaves finally show that we are in a recession.

You can easily also see that we could see steadily rising prices while all of this happens, which is what happened during the two previous periods.

As far as I can tell, the refineries have more or less quit producing jet fuel and distillates, and have the dial turned all the way to "unleaded" now.... Last week, the refinery utilization was just about the same as it was this week, but the unleaded production increased to 9 vs. 8.75, and the distillates went from about 4 to about 3.9. I guess about .1 of the difference is in lower jet fuel production vs. a couple of weeks ago, and also, in residual fuel oil....

note that the SPR spigot is open just a little wider this week too....That difference probably deprived me of beating the analysts in crude oil.

I was pretty good on unleaded this week, but way off on distillates. Chances are, only the crack-smoking analysts went so far as to predict a decrease of over 3 million barrels, and the only way for that to have happened, other than the data being screwed up, is that the demand was a lot higher than was reported in the products supplied. We compute this little "gap" every week, as you know, and this week it was up to .75 mbpd, which is abnormally high.

I did manage to correctly guess the crude oil imports. This happened only one time in 2008 and only two times in 2007, so when it does, it is enough of an excuse to go out and have an adult beverage.

I sense a little change coming to the market, because of this distillate number.... Must be the onset of spring....

Quick and dirty graph of OF2's trio of finished motor gasoline/jet fuel/distillates:



Haven't the time for another chart but reformulated gasoline continues its displacement by alcohol, hence the apparent decline here. Stocks were at 24.5 mb in '05 and are now down to about 768 kb. Jet fuel inventories seem wholly unfazed by hurricanes, recessions, price shocks.

Pup to follow through with your thoughts to some extent.

Maybe we can think of it as a sort of carry trade. People borrow oil in the front month to sell later banking on either price increase or obvious contango.

So what happens is for some reason you have a chance for oil traders to buy and store cargo's for later sale so you get a three way trade instead of a simple direct trade between producer and consumer. This three way trade has a heavy influence on inventory levels but its really a side bet using physical oil vs the normal trade.

If a above ground event like a Hurricane happens then you probably get a number of cargos entering the spot market at good short term prices since producers are unaffected. So its certainly a situation that suggest that traders can profit from physical oil. Now I question heavily the actual storage levels of normal consumers during these periods but we can ignore this for now.

The original real consumers of oil i.e refineries get back in operation and at the minimum need their normal supply at worst they need even more to cover potentially unreported drawdowns.

If the contango then steepens dramatically one can guess more of the latter is taking place
In any case the physical oil traders make money esp if the market is distorted and say prices continue to fall they can build a large position thats money in the bank.

All its really done however esp if there are underlying and persistant stock drawdowns by consumers is delay events to some extent. Eventually front month prices increase and the contango dissipates and they are forced to make delivery of the physical oil as real consumers now actually need the oil.

This leads to a stock draw down at cushing and probably regionally in the gulf. At some point along the way as real consumer demand recovers or grows the spot market becomes robust and traders and consumers are competing for oil. The traders of course exit the spot market at this point and prices continue to remain firm.

This suggests that drawdowns at cushing are important and a big signal. And it sort of explains why stock builds are not all that important since they are in general speculative in nature either the games work or they don't.

What I think is really important however is price action as the oil traders exit and the carry trade as you will unwinds. Almost exactly as you point out its the real supply and demand equation after the traders exit that determines the real situation.

In general it seems like they don't lose money either way but they either capitulate as you mentioned and dump oil in a down market or its simply a up market and the drop in contango and tightening spot market makes holding physical unprofitable.

This suggest the real interesting case is later if stocks drop then prices increase and contango increases and the oil traders are unable to jump in and build for a carry trade even if they are willing to compete for stock with regular consumers your setting on a very strong price increase signal.

Using this concept one finds this is exactly what happened at the end of 2007 contango was steep but the traders stock builds at cushing are very weak compared to past builds.

So the important signal looking at the recent past is really this second attempt to store physical oil if its weak or anemic then we could well see prices zoom. If they are able to build then steady price increases make sense.

This I'm guessing puts us in the second half of 2009 and thats where things potentially get interesting. In between I'm really guessing that we see steady price increases but probably not extreme contango with steady drawdowns at Cushing. The key bull market indicator is thus using this train of thought steeping contango with the physical oil traders unable to build.
Almost a dejavu repeat of 2007-2008 however with four important changes.

1.) The US is in a deep recession/depression not a lot of fat left to trim.
2.) OPEC probably won't do any sort of short term flood but ramp production slowly.
3.) Most of the price increase if it happens will be retracing to the previous high and may or may not reach it. The expectation in general would be that we also get the same price crash any day now.
4.) Production may be in decline and no one is going to rush out to expand see 3.

So if this plays out we will see our first official true peak oil price situation with economies weak and probably persistently high prices. Given various delays in propagation of high prices for oil through the economy I'd guess about mid 2010 is when we really enter into whatever our post peak economy will really look like.

A above ground event like a Hurricane or war in 2010 onwards could have extreme results that we have not yet seen. Or maybe I'm wrong But regardless it looks like our world is certainly headed towards its post peak economy over the next couple of years. 2011-2012 at the latest.

Good post memmel....

I think the current situation in this market is the equivalent of when one of those cartoon characters like Bugs Bunny gets whacked on the head somehow, and the stars and little birds are seen floating around as he sits in a daze.

We have a situation where the oil price has gone from 147 to in the low 30's, and now back to the 45-55 range, the money to finance any risky activity whatsoever, including do maintenance on your refineries has dried up, plus the demand situation six months out is as close to a complete unknown as we have seen in decades.

We have an apparent glut of crude oil and finished products, but at the same time, this contango situation that encourages you to hold onto your oil today so you can get more for it in December.

The apparent demand from China, the last word I heard, had dropped about 16% from year ago levels. That suggests a depression-level contraction in the economy over there. So much for central planning.

The US government has invented such a thing as "hyperdollars", numbering in the trillions, and force fed them out into the economy. This is so far removed from the type of dollars that someone earns 7 of for an hour's work that it is hard conceptually to believe that they are the same unit of currency. No doubt some of these hyperdollars have bounced around and have been used to buy something useful, such as some oil.

All we need is an "event" to occur to throw the whole situation into even more chaos than it already is.

The fun is just beginning.

I think there are only about two areas of suspense today:

I have a theory that if the oil price was under 52 last week, the crude oil imports will be less than 9.3, and if the oil price was over 52, the tankers will offload and the imports will be greater.... so since the price was not overly high last week, 9.3 is the forecast...

The next thing was the distillate demand. We had an unusual build of distillates last week, and it is difficult to attribute it to any one thing except possibly a funny estimate of some type... The little demand calculation we do, the "balance" above, should have been about 4.5 and it ended up being about 4.0 and we ended up building inventory last week when it should have been pretty close to even or a bit of a draw.... So, my theory is that this number was an anomaly, the actual demand will be something like 5% lower than last year, which will make it 4.275, and we will be about even for the week.

The unleaded demand is still pretty strong....
We will put a bit more into the SPR every week for awhile...
the refinery utilization will be about 83

So, about even in the products, and a small build in crude oil, thanks to the SPR filling, without which it would have been a "big" build.




So, we will see what happens.

http://www.bloomberg.com/apps/news?pid=20601100&sid=auuENB_LAkuk&refer=germany



http://www.ft.com/cms/s/0/d045e776-29aa-11de-9e56-00144feabdc0.html

Looks like I am pretty well in agreement with the pesky analysts this week.... you know how I hate it when that happens.



http://www.google.com/hostednews/ap/article/ALeqM5i5TtajgUpSm7KY5jf-lCJGHBB-tAD97IRMR00

Platts is a bit higher for some reason. They must be expecting more imports....



http://www.ogj.com/display_article/358911/7/ONART/none/GenIn/1/MARKET-WATCH--Oil-prices-climb-on-conflicting-inventory-reports/

Simmons was on CBS the other night, pointing out that the current collapse in oil rig activity would be a disaster within a couple of years....This is a "depression" in the oil services industry.

What fun! A big inventory increase in crude oil! Compared to the last couple of weeks, we are looking at lower refinery inputs, at only 14.0 mbpd, plus increased imports, at 9.4, that's .5 mbpd, which is 3.5 million barrels for the week, which is most of our forecast deviation.

Unleaded demand, as computed in our little calculation, is up over 10 mbpd, and distillate demand, as similarly computed, is at about 4.3, which is about what we had estimated, thus our little inventory forecasts like we do are both within roundoff error.

So, we have a situation where the captains were summoned off the beach at Padre to unload a tanker, but instead, the management and crew of the refiners are at whatever golf course is down around Port Arthur shooting golf, because they sure are not refining any products. Perhaps we will find them later at the prodigious barbecue joint in Bridge City that they like.

The records for refinery utilization only go back to 1991, but since that time, this is the lowest utilization on record for the month of April. We are getting into the time of year when the refiners "should" be trying to run at a higher rate to build up a little inventory for summer.... previously, capacity utilization has run at 90-95% during this time of year.

In fact, it's the 16th lowest all-time utilization, which includes all of those weeks in the past few years when the refiners got hit by a hurricane. There was a period in early 91 in January and February that the utilization stayed at 80 for that time.

The next sound you will hear will be the "click" when they put a padlock on the front gate of the least efficient refiners.

It's funny how, just a year or two ago, everyone was complaining that we didn't have *enough* refineries and needed to build more. Now we're seeing record-low utilization rates.

I've now read several comments on various blogs saying that the plan for this year is to import gasoline from Europe as needed. Continued low refinery utilization is making me believe this probably has a lot of truth behind it. My best guess on the refiner side is they simply don't know what demand will be like this summer.

Of course I've also said a few times that for the US at least the day we can't import finished products such as gasoline because there is not enough oil is the day we are toast. Almost certainly this is delayed but I don't like the fact that we seem to be increasingly betting the farm on the weakest link in our fuel supply which is uncertain finished product imports.

Depending on the world economy you may even find we are in a weird situation the gasoline imports are unavailable because countries that export to us have no use for the other products i.e they cannot absorb the diesel in their local economies. They are not running their refineries and thus don't have the excess gasoline.

Next it probably makes good economic sense to shut down some refineries but this just increases our dependency on imported finished products which like I stated above is dependent on the product market where the refinery is located not just on our gasoline needs.

A couple other tidbits.

US domestic crude production is up to 5.482 million bpd on a weekly basis. That's the highest since the first week of July 2005:
http://tonto.eia.doe.gov/dnav/pet/hist/wcrfpus2w.htm

Also on a weekly basis, crude stocks were 366.7 million barrels, the highest since the week of 9/21/1990:
http://tonto.eia.doe.gov/dnav/pet/hist/wcestus1w.htm

And what does that translate into with regards to consumption OF? I'm pretty sure that while it is a significant change from recently its still measurably less inventory in days of supply(comparably) due to consumption.

Figures Lie and Liars Figure.

Funny you should ask that AP. In terms of consumption, that 366.7 million barrels in crude ending stocks represents the largest number of days' supply since the week of 4-15-94.
http://tonto.eia.doe.gov/dnav/pet/hist/ ... _daysw.htm