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April 2, 2008
The Case of the Missing Oil
I wrote yesterday about disappearing iPhones, so continuing on the Encyclopedia Brown approach to investing, let's talk about the case of the missing oil. With most major economies weakening, oil prices through the roof, U.S. refinery utilization at near-term lows, and with the summer driving season still a ways away, the general consensus was that this week's oil inventory figures in the U.S. should have shown a material increase.
They didn't. Matter of fact, they showed the biggest inventory decrease since last August, which was a baffler to many of us who at least try to follow oil markets. Instead of inventories being up this past week, they were down -- and down markedly, with there being a 4.53 million barrel decline to 224.7 million barrels last week. As one trader put it to Bloomberg, "The robust supply cushion for gasoline appears to be vanishing before our eyes".
So, where the hell has all the oil gone? Well, the problem seems to be at the refined end. Crude oil supplies have been up for 11 of the last 12 weeks, so the issue isn't there. Instead,despite higher prices and a weakening economy, people are driving more than most models would predict. Granted higher refinery utilization levels would also help, but that's a two-pronged sword as higher utilization rates make the market much more prone to mad swings, with even a single refinery going offline causing oil prices to go bounding higher.
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Refineries are operating at a lower capacity than last year (82% versus 87%), probably because they needed some downtime and don't think much of the crack spread right now. They were trying to push out heating oil/diesel harder during the winter because that's where the money was (notice that natural gas also went up - cold winter), not so much gasoline. So gasoline inventories trended down. Refineries will come back as gasoline goes up in price and then they may burn through a lot of oil.
It's gonna be an interesting year.
Yep, it could well be additions to the Strategic Petroleum Reserve. They could have seen the price drop and jumped on it...just a wild guess though as I can't imagine that its demand related and decreases in capacity don't seem to be big enough to account for it.
Also, preparing for the spring changeover.
You must be talking about gasoline. Oil inventories went up by 7.4 million barrels according to the weekly status report. the 224.7 number is gasoline.
The crack spread has been so low that at times the refiners have been refining at a loss. Until the spread increases and the refiners can make a profit, they will limit production.
Paul, writing solely to commend you on the Encyclopedia Brown comment! Thought I was the only one in the world who had such fond remembrances of that series from my youth...
Is it gasoline or distillates? Doesn't the latter include home heating oil? I can testify that the winter has really hung on up here in the Northeast where that is a major fuel source. I wouldn't be surprised if people were getting third or fourth tanks.