You just get the feeling that there are some funny things going on.... maybe it's just below the surface... maybe it just stayed too quiet for too long.... maybe it's just the season, people getting ready to gear up for summer...

a. We have this situation with the tankers, noted above... an unprecedented collapse in the baltic dry rate, lots of floating storage available.

b. big fluctuations in the import figure every week... the system importing as much oil as ever, even though the inventory is at a multi-decade high....

c. the refining capacity dropping temporarily to a new multi-decade low for April a couple of weeks ago, followed by an uptick last week..

d. the pricing, increasing a couple of dollars on Sunday night, like it did yesterday... still off by 66% versus a year ago...

e. You have the demand. Unleaded demand is within roundoff error of what it was last year at this time. Distillates way off, jet fuel way way off....

f. The little "gap" between calculated and actual demand on unleaded.... it was over 1.1 mbpd last week, which is really high, compared to its historical level of about .7, which suggests that there are a lot of blending components coming into the country, that are double counted as they are blended at the tank farm....

g. We have the trillions of dollars that were pumped into the economy over the last six months looking for a home... some of it ended up in gold, which is still over 900 I think.... perhaps some of it is ending up in oil....

h. No word from China on anything.... except their demand was down 16% or something year-on-year.

i. Suggestions that OPEC did indeed cut back this spring, but all of the volume being made up by Russia and Brazil

j. Potential collapse of Cantarell....

So, there are a lot of things going on in the subsurface, that for the moment are ending up as nothing, but might at some point end up as something.....

As long as we continue to import 1.1 mbpd of unleaded into the country, at the current usage levels, we will continue to build inventory.

Despite the increased refinery usage, plus deposits into the SPR, we will continue to build the crude a little... despite the fact that the citizens of Cushing are already ankle-deep...as long as we continue to import over 9 mbpd

the production dial is all the way turned toward "unleaded" right now, so we will be about even in distillates, as long as the demand remains seasonally like it now is.

This could get fun, if there are widespread disruptions in the travel system because of the flu.....

Perhaps it is time to lay in a supply of popcorn....

I read that China is investing in a massive oil storage facility.
Also, CITGO refining is in dire straits. Well, CITGO in general. They're looking to sell assets.
WNR is looking to sell Yorktown. SUN dumped a refinery. Flying J went belly up. How much refining capacity is at risk? Looks like a big shake-out coming in the refining patch.
And the Venezueluan PDVSA is looking to market some Orinoco assets. Ha! Do you think Conoco-Phillips or Exxon might be interested?
And how does all this affect inventory?

Chief

http://www.bloomberg.com/apps/news?pid=20601087&sid=afi3_VYIBVfE&refer=home

We just had this conversation the other day.... We now know that with the gross refining margins where they were, which is the $9-$11 per barrel range, BP is now making about $6 which means that their variable cost must be around $4-5 with that big refinery at Texas City running. We also know that if the industry is running at 83 and they are running at 92, somebody else must be really struggling.

Chief, you are right.... someone is going to be squeezed out of the refinery business.....

The 300,000 bpd is just about the difference we were looking for in domestic production.... it was running at about 5.1 for awhile before the storms last year, now up to 5.4....

Notes from the VLO conference call (and I'll try to make this relevant to this thread)
1. Total refining capacity utilization estimated at 2,440,000 bbl/day plus/minus 35K for the second quarter
2. Delaware City refinery was shut down for all of March and almost all of April
3. Estimate on 2Q systemic per barrel net cost is $4.40/bbl. Last quarter was 4.49/bbl. I believe this was in the ballpark that Pup quoted for BP.
4. They see gasoline demand down 2.5% nationwide; within their marketing system a 1% increase.
5. They market around 117K bbl/day from each of their retail cites, and 10% is diesel, so someone else can do the math it they're interested.
6. They are estimating around 36million tons of CO2 liability. Didn't catch the time metric there.
7. They keep around 115 mm bbl oil in storage right now at any given time.
8. They mentioned (OK, it was Bill Klesse) that there was "lots of oil on the water earlier in the year"...pretty much confirming Pup's suppositions.
9. They are buying crude oil from "water, Vz, Iraq."
10. They can make up to $1/bbl shipping refined products to Europe at this time. Some sort of arbitrage. What the heck, I'm not a trader.
11. They attribute around $150million in last q earnings to the contango trade. This was especially true in the mid-continent region.
12. They saw no difference in refined gasonline imports between this year and last.
13. They use 400,000mm BTU/day of nat gas to fuel their operations. With these prices very low they reaped significant benefits in this dept.

Hope this helps.

Chief

http://www.bloomberg.com/apps/news?pid=20601116&sid=aEep1aOZcRU0&refer=africa

You know, I really enjoy Wednesdays....

http://www.reuters.com/article/marketsnews/idAFN2831724420090428?rpc=33

A couple of years ago, VLO claimed their refining capacity was around 3.3 mbpd....
but giving them the generous benefit of the doubt, 2.44/3.1 equals about 78% utilization.... VLO is trading at about 20, down from 55 a year ago. But, you're right, their variable cost is not too far off from BP....

Well, the analysts whipped up on me this week, I suppose that it could have been worse....

The interesting drop in unleaded was a combination of three things that were a total of 6 million barrels off of my terrible prediction: the reduction in imports amounted to 1.8 of the six, the production was within roundoff error, .7, and the "demand", as calculated, was 3.5 higher than I forecasted, which is really significant. The ongoing "gap" between products supplied and the actual demand as calculated was 1.5 mbpd higher......I will have to go back and calculate but I think the average was around .7 and this is almost an extreme case....

The distillates, well, the knob has apparently been turned back toward "distillates" this week....production is a little higher, proportionately, than it has been compared to unleaded.

In crude oil, I was off by a bit in imports, which were still 9.8 mbpd, so you have to wonder what people are thinking, still bringing all of that crude oil into the country.

So, maybe the market will look at the unleaded demand, and unleaded inventory and say "pretty strong" and the refinery margins will get up a little bit. Then, those refinery managers will get off of the golf course and back running the units....

We are, after all, only 20 million barrels off of the MOL..... and we are down 7 million barrels since then end of January....(just kidding)

Pup55 going on the assumption that their will be a play to squeeze out some refiners probably over the summer. We have already discussed the fact that the US seems to have infinite stoarage capacity for oil. It seems we are now using tanks not filled since the 1950's.

The next large distortion in the market seems to be distillates. Here I think we can look back on last year and wonder what this year will bring. The US made a lot of money exporting distillates. Given that it seems that everyone is setting up to take advantage of a chance to export distillates at a excellent price margin. There seems to be no reason on earth for the persistent large build in distillates.
Poking around on the EIA web site shows that at least to date we have seen a strong build up in distillate exports.

It seems that refiners have just about bet the farm on strong demand for distillates for export which tend to be counter to the claim the world is awash in oil and demand for distillates should remain weak.

For US gasoline BP's magical European imports seem to be keeping everyone scared. This makes sense since US gasoline demand for some reason seems to be the one thing that can routinely be met with strong imports.

And last but not least I can't imagine that refiners plan on setting on huge stockpiles of distillates forever I just can't see them building this large a stockpile unless its for expectations of strong exports within the next six months at most. And its a safe bet that US demand for distillates will remain anemic at best.

But of course all this wraps back around to crude since the only way you can get a strong export demand for distillates outside the US is for crude inventories to be tight. I simply can't see this happening if crude is plentiful.

One would think that well before we see demand for distillates grow outside the US we would see other refiners take advantage of the flood of oil to meet distillate demand.

Again any attempt to use logic and accept all the information thats been presented as truth from public sources results in a logic failure. Its reaching the point that if you accept the information from formerly reliable sources then the only conclusion you can come up with is that US refiners have joined a cult and are getting ready to practice mass suicide.

We're only about 17 million barrels away from the record of 391 million barrels set in June, 1990.

OF,

That short term picture you keep reffering to is the sideshow. Stocks are high because of all the reasons pup55 has been telling you for the last 6 months.

Contango recently, Refining margins sucked badly last year and are still not spectacular, and demand has come down slightly. Hence not as much oil is being refined and you build inventory. Its not solely due to some cornucopian fantasy of increasing production.

On the jet fuel front as demand for seats drops with the economic crisis, your going to see that number fall more I believe. We need to see what happens economically over the next 6 months but right now plans on the airline front are cautious and hoarding capital is the name of the game. Some big expansion plans got put completely on hold due to the high cost of jet fuel last year. My personal take is that the latest rally in the markets is not going to last and we got a god bit farther down to go before any bottom is reached.

Memmel - Tom Whipple notes in the new Peak Oil Notesthat, at least in the EU, we've about hit the ceiling: Oil Floods Rotterdam, Europe's Largest Port, as Demand Drops - Bloomberg.com



Also this: Business Daily Africa - the international window into East African business opportunities - Oil stored at sea rises to record levels

To quote your first quote.



Notice the little piece about having no unreserved space available ?

Now here is the important part. If you apply the concept of fractional reserve lending to crude oil and assume that people are effectively setting up crude oil banks then you get a interesting situation.

First and foremost the oil trade itself is turning into a triangle trade oil producers don't store much oil to balance supply and demand as soon as they pump it they effectively sell it to the oil bank. The bank then holds the oil in deposit loaning it out only when its profitable.

For the bank to be effective they need to do two things first build up a large supply of stored oil to ensure they don't have a bank run then leverage the hell out of it. What this means is claiming immense levels of storage but really simply using money not oil to buy forward on the futures contract for delivery. They only need maintain a fractional reserve to ensure they are always able to lend. Buy buying heavily into the futures market for delivery they ensure a steep contango covering physical holding costs for their oil bank and of course ensuring that future supply will be tight as their customers are blocked from buying oil directly.

If you know for a fact that overall production is really in decline esp OPEC then its a very very safe bet to set up this Oil Bank you really can't lose unless the economy collapses completely.

This new three way trade is very beneficial to producers since it effectively buffers downward price moves and ensures a steady increase in price. As with our fiat money system this sort of fractional reserve lending is inflationary. Claims on future production tend to grow overtime as the bank cuts off customers from direct access to oil.

Now on the tanker issue what I've found surprising is that the claim of the number of mysterious tankers full of oil somewhere in the world remains relatively constant. This has been going on now for like seven months. This fits well with it representing a fairly static reserve base.
As far as to the actual amount at sea and the claims of storage being full on land well who really knows ? You can reserve both tankers and land tanks and simply not fill them. Sounds insane I know but you ever look into a vault at your typical bank or its books ? They don't have anywhere near what they claim. And of course if your going to play this game your going to leverage you have too. I'd guess at least 2:1 -3:1 and 10:1 is the sort of standard for banking. I think the leverage is lower for a physical oil bank since you have to take production as it comes to keep your reserve level up. Thus I really think that real physical oil actually available right now is 50-70% less than whats been claimed. We have the same physical barrel representing several faux barrels.

To actually function as a credible bank its fairly easy to guess that they would need at least 100 million barrels of physical oil and probably would preferr a bit higher say 200-300 million barrels.

And to keep the trade going they need to be at least a credible exporter equal to one of the larger direct exporters thus they need to do 2-4mbd in real crude transactions. At 4mbd thats 120 million barrels a month. At 2mbd its 60 mbd a month. Right now at least I think this new oil bank is controlling closer to 2mbd. Obviously if you look and ignore the claims they are setting up to grow to 4mbd. This would mean pushing the amount of real physical oil on hand out to closer to 300 million barrels of real black oil in the "bank" at anyone time to ensure they can make deliveries. I don't think the bank has reached this level yet. And obviously you can no longer trust any physical claim related to the bank beyond say 150 million barrels which is pretty much its bottom limit for being functional and claiming enough market share to be able to control pricing.

Now why would OPEC play along ? Well first production is probably collapsing and next the bank acts as a buffer soaking up oil no matter where its coming from by working with the Bank OPEC effectively controls oil production levels for the entire world gets a pretty strong assurance of steady price increases and no more violent flucuations and the "interest" they are paying by letting the bank manage their oil deposits is probably not bad say they are leaving only about 10% of the price on the table for say 5-10% of their production.
Its a say only a 1% hit on profits !

For this idea to work a couple of facts have to remain constant.

1.) We will always get reports of some high number of VLCC's being used as storage waiting to flood the market at a moments notice.
2.) Land storage that can be leased will remain "full" to prevent people from bypassing the bank and storing their own crude. How much is actually in these tanks at any given time is completely unknown. But they will remain permanently contracted out.
3.) OPEC and indeed the world is incapable of pumping more oil in the future than they pump today the real decline rate needs to be high enough to ensure that a producer can't flood the world with oil wiping out the bank.

If you think about it if the world is post peak and if production is in a steep decline its only natural that someone will take advantage of the situation to build up a hoard of oil and resell it.
At the bottom its simply good old fashioned hoarding. However given the scale in the money involved you have to figure that the players setting up the oil bank are very very very very certain that certain factors will play out a certain way otherwise they are at risk of being blown out.

And last but not least can the oil bank grow to control 400 million barrels of real physical oil at any one time ? I think so this would be say 200 million barrels scattered on land and 200 million barrels at sea or about 100 VLCC's. Whats interesting is this would only work if they think they can take 100 VLCC's out of the market without causing tanker rates to go screaming. If storage costs go to high then the game starts falling apart. I find it telling that if I'm right that someone is confident that overtime they can safely use 100 VLCC's or more as storage without causing a spike in the rates.

If nothing else that alone is telling.

Very interesting post memmel. Some definite food for thought in there.

May day.....

It will be interesting to see what happens in May this year. Historically, the refiners use this as a chance to scale up for their summer production. Last year, the refiners went from 85% utilization to nearly 90% utilization during the four weeks starting May 1, and I think they maxed out at about 90 throughout the month of July, but I have to say that the system has been at 83% capacity so long now, that it remains to be seen whether or not it will ever get back to where it was. In fact, it used to be common for the refiners to run 97-100% but that has not happened for several years.


There is no compelling reason to think that the ongoing situation with crude oil imports is going to stop suddenly. The economic forces that are causing crude oil to be imported in greatly excess amounts over and above its actual use are likely to continue for a bit longer, namely the contango situation, the free tanker storage/oil bank situation, the continued desire for people to take delivery of actual crude oil (probably directly related to peoples' lack of confidence in money) the seemingly unlimited apparent storage capability, the urgency by which Russia and mexico are willing to keep selling oil to prop up their national economies, over and above OPEC's decision to cut back, and any of a dozen other reasons. So if you assume about 10 mbpd of imports, and back-work the 83% refinery utilization, it's pretty easy to come up with an implausibly big build in crude oil inventory, about even in distillates, and a decrease in unleaded.

Nobody but me knows it yet but the underlying demand number for unleaded is a lot higher than the "products supplied" has been, and I am thinking a banner year for people to head out to Mt. Rushmore in their Family Truckster this summer, once the swine flu thing has died down. Also I think that people are running their refineries in the cheapest way possible and doing as much blending as possible at the tank farm......which makes the unleaded production number a lot higher than it should be based on the crude oil inputs or the refinery utilization.....

it will be interesting to see where we are in a month, in refinery activity.... Maybe they will not run them as much this year.... there is plenty of crude oil around....