R-Squared Energy Blog

Pure Energy

Why Gas Prices are Rising Again

Every time gas prices start to go up, my essay “Why Are Gas Prices Rising?” gets a lot of hits from Google searches by people looking for an explanation. Because the supply/demand dynamics have changed, that essay needs dusting off, especially in light of stories like this:

Pros puzzled by gas prices

Fuel industry pundits have been left scratching their heads at the recent jump in gas prices, which have increased despite plummeting crude prices.

“The nationwide average retail price of self-serve regular gasoline seems to be defying gravity this month,” according to American Automobile Association (AAA) Director of Public Relations, Geoff Sundtrom, “as it continued to rise in the face of sharply lower prices for crude oil and wholesale gasoline.”

Oil prices closed out at $34.78 per barrel last Friday, according to AAA, the lowest they’ve been since April 5, 2005, when the nationwide average retail gasoline price was $1.76 per gallon compared to Monday’s nationwide average of $1.842. Average nationwide prices jumped slightly to $1.848 on Wednesday. The statewide average is slightly higher at $1.851 per gallon. By this Friday, prices had risen to $46.47, according to The Associated Press.

First things first. Checking the EIA data, their numbers/trends don’t match up. Per the EIA, in April 2005 retail gas prices were $2.28 a gallon (Source) when West Texas Intermediate was trading at $52.98. In early 2009, retail gas prices (per the EIA) are at $1.84 with WTI hovering around $40. AAA is obviously using their own metrics, but a scan of the various EIA gas prices show a pretty consistent trend: Gas and oil prices both sharply down from 2005.

But, it shouldn’t surprise anyone that gas prices would be headed back up – even if oil prices are stagnant. Gasoline had over-corrected to the downside in relation to oil prices. In fact, crack spreads – a measure of the difference between the price of oil and the price of the products – did go negative in late 2008. That is unsustainable, and an indication that gas prices must correct to the upside (or refiners will start to cut production since they are losing money on every barrel). So why are gas prices rising? Because they fell too far. (Nobody ever seems to ask why gas prices fell so much in relation to crude oil; they only get excited when the opposite occurs).

There is another key factor to consider when comparing the behavior of gasoline and oil prices. I have seen them move in opposite directions on numerous occasions. Here is an example of when they might do that. Let’s presume that we have a glut of oil, but a refining bottleneck. In such a case, you would see little demand for oil, keeping the price low. But if refiners are having trouble keeping the gasoline market supplied, then gasoline prices will rise in relation to oil prices. This has taken place multiple times over the past few years, and can usually be understood if you watch the crude and finished product inventories reported each week in This Week in Petroleum.

Other factors that impact the price of gasoline include the strength of gasoline imports (primarily from Europe), and refinery utilization (both of which are reported weekly at the EIA). If gasoline demand is strong, and something happens to reduce the utilization number (e.g., hurricane), prices spike. If demand starts to slacken, you will see refiners start to dial back their utilization.

January 27, 2009 Posted by | EIA, gas inventories, gas prices, oil inventories, oil prices, twip | 54 Comments

Rank the Top 10 Oil Stories of 2008

As I recover from a backlog of work, one of the stories I plan to write is a post covering the top energy stories of 2008. Around that theme, Platts just put up a request for reader input on the top oil industry stories of 2008. Their poll runs until Christmas:

Rank the top 10 oil industry stories of 2008

Below is the way I would rank the Top 10. I had an easy time ranking the top five, but then it was more difficult to sort them out.

My top 10 oil industry stories of 2008:

  1. Crude prices soar in 1H, WTI tops $147, Brent right behind
  2. Prices collapse below $50 in 2H as demand retreats
  3. Ethanol’s struggles: VeraSun bankruptcy, others barely profitable, spreads collapse
  4. Push begins to lift offshore drilling ban in US; Obama and McCain differ on approach
  5. Capital crunch and low prices lead to deferred investment
  6. Shale gas supply in US surges, a new factor in supply/demand balance
  7. Credit crunch slows activity for once free-wheeling traders
  8. Diesel surges, gasoline/naphtha plunge; traditional cracks skewed
  9. Russian oil output to fall in 2008, first time in a decade
  10. Brazil subsalt finds continue to lift nation’s upstream prospects

A couple of options that weren’t on the list (I placed them in the suggestion box) were:

  • Peak oil becomes fashionable, then unfashionable again
  • Obama elected; potential major impact on energy policy
  • Feel free to share your own input. What other stories do you consider to be Top 10 material (not limited to the oil industry)?

    December 5, 2008 Posted by | Media coverage, oil inventories, oil prices, oil production, Peak Oil | 36 Comments

    This Week in Petroleum 1-30-08

    Updated

    Gasoline inventories did in fact edge upward, as gasoline imports were very strong. Had that not been the case, gasoline inventories would have definitely come down, as utilization continues to trend down. In fact, just glancing over the data, more gasoline may have been imported this January than in any other January before. As long as that continues, gasoline prices won’t gain much traction. But European refiners have to take turnarounds as well, so gasoline imports typically fall off in February and March.

    Here is the summary:

    Summary of Weekly Petroleum Data for the Week Ending January 25, 2008

    U.S. crude oil refinery inputs averaged 14.6 million barrels per day during the week ending January 25,down 302,000 barrels per day from the previous week’s average. Refineries operated at 85.0 percent of their operable capacity last week. Gasoline production edged slightly lower compared to the previous week, averaging about 8.9 million barrels per day. Distillate fuel production fell last week, averaging nearly 3.9 million barrels per day.

    U.S. crude oil imports averaged about 10.1 million barrels per day last week, down 100,000 barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged 10.1 million barrels per day, unchanged from the same four-week period last year. Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged nearly 1.2 million barrels per day. Distillate fuel imports averaged 277,000 barrels per day last week.

    U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) rose by 3.6 million barrels compared to the previous week. At 293.0 million barrels, U.S. crude oil inventories are in the lower half of the average range for this time of year. Total motor gasoline inventories increased by 3.6 million barrels last week, and are above the upper limit of the average range. Both finished gasoline inventories and gasoline blending components inventories increased last week. Distillate fuel inventories declined by 1.5 million barrels, and are in the lower half of the average range for this time of year. Propane/propylene inventories decreased by 3.0 million barrels last week. Total commercial petroleum inventories decreased by 1.0 million barrels last week, and are in the middle of the average range for this time of year.

    Pre-Release Commentary

    OPEC is meeting later this week, but the comments coming from various members indicate that they are unlikely to boost production. I think this continues the theme that we saw most of last year, where truly low inventories were mostly prevented by higher prices, and then OPEC used the inventory situation to suggest that markets are adequately supplied – which completely ignores the price signal. But certain OPEC members have now grown dependent upon the revenues provided by $100 oil. As long as they maintain solidarity, it is unlikely they will allow the price to drop too much – recession or now.

    Here is what analysts are forecasting for this week:

    A Reuters poll of analysts ahead of weekly U.S. government inventory data forecast a 2.1-million-barrel rise in crude stocks, a 1.9-million-barrel draw in distillate inventories and a 2-million-barrel build in gasoline stockpiles.

    If spring turnarounds are indeed starting early, then the only way gasoline stockpiles will build is if gasoline imports remain strong (which they were last week). If that is the case, then $4 gasoline will remain elusive, as imports will keep pressure off of inventories.

    That same story also had a note about speculative positions:

    U.S. regulator data on Friday showed NYMEX crude oil speculators slashed their bets on rising prices in the week to Jan. 22 to their lowest since mid-December, cutting net long positions by nearly 50,000 lots to 37,000. “It shows the large speculative funds reducing aggressively their net length exposure on futures through a combination of long liquidation and fresh short positions,” said Olivier Jakob at Petromatrix.

    There is concern about a recession dropping prices, but I think the counter to that is that OPEC would probably be willing to cut if prices dropped too much. I will update following the release of the report.

    January 29, 2008 Posted by | EIA, gas inventories, gas prices, oil inventories, oil prices, twip | 40 Comments

    This Week in Petroleum 1-24-08

    Updated:

    Not too much to get excited about. Those reports of some refineries coming down early for turnarounds due to low margins look to be accurate, given the drop in refinery utilization. That would also explain the rise in crude inventories, but typically you start to see gasoline inventories coming down as the refineries come offline. Gasoline production did fall, as one would expect as turnaround season begins. However, gasoline inventories increased on the back of very strong gasoline import numbers.

    The highlights:

    Summary of Weekly Petroleum Data for the Week Ending January 18, 2008

    U.S. crude oil refinery inputs averaged 14.9 million barrels per day during the week ending January 18, down 91,000 barrels per day from the previous week’s average. Refineries operated at 86.5 percent of their operable capacity last week. Gasoline production moved slightly lower compared to the previous week, averaging about 9.0 million barrels per day. Distillate fuel production fell last week, averaging 4.1 million barrels per day.

    U.S. crude oil imports averaged about 10.2 million barrels per day last week, down 233,000 barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged nearly 10.1 million barrels per day, or 0.1 million 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 1.2 million barrels per day. Distillate fuel imports averaged 242,000 barrels per day last week.

    U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) rose by 2.3 million barrels compared to the previous week. At 289.4 million barrels, U.S. crude oil inventories are in the lower half of the average range for this time of year. Total motor gasoline inventories increased by 5.0 million barrels last week, and are above the upper limit of the average range. Distillate fuel inventories declined by 1.3 million barrels, and are near the middle of the average range for this time of year. Propane/propylene inventories decreased by 3.3 million barrels last week. Total commercial petroleum inventories increased by 2.2 million barrels last week, and are in the middle of the average range for this time of year.

    Pre-Release Commentary

    This week’s inventory report will be delayed until Thursday due to Monday’s holiday. As we move toward spring, inventory levels will be influenced by 1). Spring turnaround season; and 2). The return of summer gasoline blends. Typically, turnaround season doesn’t really kick off until late February to early-March, but a note from the OPIS report that came out on Wednesday stated “Apparently, the 2008 refinery turnaround season has been launched early, particularly at the U.S. Gulf Coast.” In the face of horrible margins, it makes sense to move turnarounds up and take the outages now, as opposed to later when margins should firm up.

    If lots of refiners do push up their turnarounds, we will see crude inventories start to build earlier than normal (which may have already started), and gasoline inventories will start to be pulled down as they were last spring. Gasoline inventories have recovered from the record low levels of last year, and are setting in pretty good shape heading into the turnarounds. Whether we reach $4 gasoline is going to depend on the draw down rate, which last spring was very steep.

    Back to the OPIS reports, last Friday’s report contained a very interesting story that I have not seen reported in the media. Here is an excerpt:

    A couple of traders and refiners on the U.S. West Coast may have found an outlet for the burgeoning gasoline stocks after fixing two ships to sail to Asia or Australia, industry sources said on Friday.

    The West Coast gasoline stocks have reached the highest level since February 2006, prompting some traders to look for outlets in the East Coast in a potentially unprecedented move, and, possibly, the Gulf Coast, Asia, Australia or the west coast of Mexico.

    As of Thursday, two ships were booked to load gasoline on the West Coast for delivery to Asia or Australia. Pacific Ruby was booked to load at the end of January, and Wang Chi was fixed to load on Feb. 1. These ships are likely to sail to Singapore or China or Australia.

    “Those two vessels were booked earlier this week,” a source said. “A few ships were provisionally booked on Thursday for the same voyage, but all those fixtures failed.”

    Good Resources

    It goes without saying that the inventory reports from the EIA are must reads every week for me. There are several other resources that I utilize on a daily basis to keep up with what’s going on in the world of energy. One is The Oil Drum, where the important headlines are usually captured in the daily Drumbeat. The daily subscriber reports from OPIS are a very valuable source of information on the energy markets, and they often contain information that I never seen in any publicly available sources. The reports also have daily pricing updates for gasoline (and gasoline blending components), distillates, and ethanol. (I see that spot ethanol prices are headed back up, and are once again higher than spot premium gasoline on the West Coast).

    Platts is another good resource that covers a lot of areas that OPIS doesn’t. Platts also has a blog, The Barrel, that usually covers supply/demand issues (and links back to both TOD and my blog). Finally, Rigzone usually keeps me updated on the latest exploration and discovery news. One source that I have available with my company is a daily news summary from various categories such as Energy, Oil, Alternative Energy, etc. Sometimes I spot a story there that I find particularly interesting, and I link to the original source and write about it. Anyway, just wanted to share some of the resources that I find especially useful.

    January 24, 2008 Posted by | EIA, gas inventories, gas prices, oil inventories, oil prices, twip | 120 Comments

    This Week in Petroleum 1-16-08

    With all of the traveling, and then trying to catch up after the holidays, I haven’t had time to do a proper TWIP. Anyway, mostly what we saw for the past month were crude draws, and gasoline inventories climbing back up and getting in pretty good shape prior to spring turnaround season. Part of the draw down in crude was tax-related. Many countries, including the U.S., tax crude inventories at year end. So, there is a bit of a balancing act as refiners try to draw down inventories while still maintaining enough on hand to weather any supply disruptions.

    This week saw a large gain across the complex, and crude prices are falling as a result.

    Summary of Weekly Petroleum Data for the Week Ending January 11, 2008

    Some highlights:

    U.S. crude oil refinery inputs averaged nearly 15.0 million barrels per day during the week ending January 11, down 760,000 barrels per day from the previous week’s average. Refineries operated at 87.1 percent of their operable capacity last week.

    U.S. crude oil imports averaged 10.4 million barrels per day last week, up 583,000 barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged 10.0 million barrels per day, or 219,000 barrels per day more than averaged over the same four-week period last year.

    U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) rose by 4.3 million barrels compared to the previous week. At 287.1 million barrels, U.S. crude oil inventories are in the lower half of the average range for this time of year. Total motor gasoline inventories increased by 2.2 million barrels last week, and are near the upper limit of the average range. Total commercial petroleum inventories increased by 3.6 million barrels last week, and are in the middle of the average range for this time of year.

    CNN’s take:

    Oil below $90 on surprise supply increase

    NEW YORK (CNNMoney.com) — Oil prices fell sharply Wednesday after the government reported a surprise increase in crude supplies.

    U.S. light crude for February delivery fell $2.20 to $89.62 a barrel on the New York Mercantile Exchange. Oil had traded down $1.21 prior to the report’s release.

    In its weekly inventory report, the U.S. Energy Information Administration said crude stocks grew by 4.3 million barrels last week, after posting declines for eight weeks in a row. Analysts were looking for a drop of 300,000 barrels according to a Dow Jones poll.

    “The market looked at the report as bearish, given the increase in crude stocks,” said Andrew Lebow, a broker at MF Global in New York.

    My take: As we move into refinery turnaround season from late February through April, we should see crude inventories start to build, and gasoline inventories should get pulled down. That should start a run toward $4 gasoline.

    January 16, 2008 Posted by | EIA, gas inventories, gas prices, oil inventories, oil prices, twip | 4 Comments

    Rank the Top 10 Oil Stories of 2007

    While I intend to write a post covering the top energy stories of 2007, Platts is asking for reader input on the top oil industry stories of 2007:

    The top 10 oil industry stories of 2007

    A lot of the listed stories would make both lists. I list my Top 10 below that I submitted to Platts. The first few were easy, but I had a hard time picking between the last three or four.

    My top 10 oil industry stories of 2007:

    1. Oil soars, reaches close to $100 for WTI
    2. Spare capacity dwindles, supply/demand balance tightens; Peak Oil theory gets more attention
    3. Climate change rapidly moves up the list of the world’s concerns; US Senate votes for mandatory GHG emission limits
    4. OPEC increases production by 500,000 b/d in November, rejects a further increase after that
    5. Weakness in demand in developed countries more than offset by strength in developing nations, like China
    6. Venezuela takes over former foreign-operated fields
    7. Ethanol use soars in the US, but its price plunges
    8. Cost pressures lead to some diverted refinery plans
    9. WTI plunges below Brent in spring on buildup in Cushing inventories
    10. Iraq production slowly begins to recover

    I think by far the biggest stories were the supply/demand issues, oil prices, and the fact that the MSM “discovered” Peak Oil in 2007. Ethanol was a big story as well, but I would have put it differently. 2007 was the year that the realization of the downsides of corn ethanol finally reached critical mass. One other thing I think I would have listed among the stories was something around the Congressional hearings, and/or attempts to pass an energy bill.

    So, let the debate begin. What else should be on there? What do I have too high? Not high enough?

    December 12, 2007 Posted by | Media coverage, oil inventories, oil prices, oil production, Peak Oil | 38 Comments

    This Week in Petroleum 12-12-07

    Updated: You would think if last week’s large inventory drop was due to fog-induced delays, all of that crude would show up this week. Not so, as another drop in crude inventories was recorded:

    U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) dropped by 0.7 million barrels compared to the previous week. At 304.5 million barrels, U.S. crude oil inventories are in the upper half of the average range for this time of year. Total motor gasoline inventories increased by 1.6 million barrels last week, but are near the lower end of the average range. Both finished gasoline inventories and gasoline blending components inventories increased during this period. Distillate fuel inventories decreased by 0.8 million barrels, but are in the lower half of the average range for this time of year.

    If gasoline inventories continue to improve, we may yet avoid $4 gasoline in the spring. But I still wouldn’t count on it. More from the report:

    U.S. crude oil imports averaged nearly 10.1 million barrels per day last week, up 689,000 barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged 9.9 million barrels per day, or 86 thousand barrels per day more than averaged over the same four-week period last year.

    Well, on the other hand the sharp rise in crude imports would tend to support the fog story. Refinery utilization fell, which would help keep crude inventories up, but lower gasoline inventories:

    U.S. crude oil refinery inputs averaged nearly 15.3 million barrels per day during the week ending December 7, down 172,000 barrels per day from the previous week’s average. Refineries operated at 88.8 percent of their operable capacity last week. Gasoline production moved higher compared to the previous week, averaging nearly 9.2 million barrels per day. Distillate fuel production fell last week, averaging 4.2 million barrels per day.

    —————————-

    Just as last week’s report was largely overshadowed by the OPEC meeting, this week’s report will come on the heels of the Fed’s announcement on interest rates. (Update: The Fed cut interest rates by a quarter point). Here are the expectations:

    U.S. gasoline stockpiles probably rose for a fifth time last week, gaining 1.5 million barrels, based on the median estimate of 10 analysts surveyed by Bloomberg.

    Supplies of distillates probably climbed 500,000 barrels, their second gain, while crude oil inventories probably rose 50,000 barrels after dropping 7.9 million barrels a week earlier when the Houston Ship Channel was shut by fog.

    Investors will be more focused on the Fed announcement, Excel’s Waggoner said. While a quarter-point cut is a “foregone conclusion” there is a chance the bank may lower rates by a half point, which would weaken the dollar and may slow the decline in oil prices, he said.

    I think that if the reason for last week’s large decline in crude inventories was due to delayed offloading of shipments because of the fog, we will probably see a larger increase than 50,000 barrels of crude this week.

    However, next week’s report should be interesting, because on Monday an ice storm shut down the terminal at Cushing, Oklahoma – the delivery point for NYMEX crude:

    NEW YORK, Dec 11 (Reuters) – The largest crude oil terminal at the delivery point for NYMEX crude oil futures at Cushing, Oklahoma, and two major pipelines at the hub were still shut Tuesday after an ice storm hit the area Monday, a spokesman for the terminal said.

    Enbridge Energy Partners LP’s 16.7 million barrel crude oil terminal and the Spearhead and Ozark crude oil pipelines operated by parent company Enbridge Inc were shut Monday, Enbridge spokesman Larry Springer said.

    “They went down about 1:00 (Central Time),” said Springer.

    Spearhead transports 125,000 barrels per day (bpd) of crude oil from the Chicago area to Cushing. The Ozark line can carry approximately 200,000 bpd from Cushing to Wood River in southern Illinois.

    Springer said that the crude oil terminal at the Cushing was also closed due to power outages.

    I am all too familiar with the devastation that can be caused by Oklahoma ice storms. I have been through a couple of bad ones. Oil futures are rallying on the news.

    Note: As I mentioned a couple of days ago, this is likely to be the last TWIP update from me for the next four weeks.

    December 11, 2007 Posted by | EIA, gas inventories, gas prices, oil inventories, oil prices, twip | Comments Off on This Week in Petroleum 12-12-07

    This Week in Petroleum 12-5-07

    Update following the release:

    Big surprises all around this week:

    Summary of Weekly Petroleum Data for the Week Ending November 30, 2007

    U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) dropped by 8.0 million barrels compared to the previous week. At 305.2 million barrels, U.S. crude oil inventories are in the upper half of the average range for this time of year. Total motor gasoline inventories increased by 4.0 million barrels last week, and are below the lower end of the average range. Both finished gasoline inventories and gasoline blending components inventories increased during this period. Distillate fuel inventories increased by 1.4 million barrels, but are in the middle of the average range for this time of year. propane/propylene inventories decreased by 0.5 million barrels last week. Total commercial petroleum inventories decreased by 3.8 million barrels last week, and are in the upper middle of the average range for this time of year.

    U.S. crude oil imports averaged nearly 9.4 million barrels per day last week, down 980,000 barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged 10.0 million barrels per day, or 121 thousand 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 nearly 1.2 million barrels per day. Distillate fuel imports averaged 299,000 barrels per day last week.

    I don’t recall ever seeing a crude inventory drop that large. If I had a little more time today, I would check the history, but that drop should certainly rank up there among the biggest. (Note: I did go back and check, and there was a drop of just over 8 million barrels in the 2nd week of December last year).

    Interestingly, the markets aren’t reacting much to this drop, or to the news from OPEC suggesting that they won’t increase output. The inventory news is offset a bit by the fact that there was a gain at Cushing, but you would think this combination of news would put oil back up over $90. The price briefly popped up above $90, but as I write this, oil has dropped back to $88.72. A month ago, it seemed like every bit of news drove prices higher, but it now looks like we are operating in a different environment.

    ———————–

    What a volatile week it’s been. In last week’s TWIP, with oil trading in the mid-$90’s, I wrote that I expected it to drop back into the $80’s soon. Following last week’s inventory report, WTI did take a dive, but then a pipeline explosion in Minnesota – in which two people were killed – drove prices right back over $95. But the price could not be sustained, and signs of increasing supplies and softening demand, coupled with the possibility that OPEC would bump up production at their December 5th meeting, resulted in a drop into the $80’s by the end of the week. This was the steepest weekly decline in more than two years.

    Will They or Won’t They?

    Overshadowing this week’s inventory report is the OPEC meeting on December 5th. There have been so many conflicting statements – at times even originating from the same country – that it is hard to determine whether members will agree to increase production rates beyond the current quotas.

    At one point Saudi oil minister Ali al-Naimi said “There is absolutely ample supply.” At another time, he said that “the field is wide open” regarding the possibility of an increase. Here are some excerpts from a couple of news stories on the upcoming meeting:

    Oil Prices Edge Up Ahead of OPEC Meeting

    Prices rose and fell throughout the day as differing statements were reported from delegates of the Organization of Petroleum Exporting Countries arriving in Abu Dhabi, United Arab Emirates, for Wednesday’s meeting.

    Oil prices have dropped about $10 in one week on the belief that OPEC has all but decided to boost production. But the price drop itself has raised questions about whether oil ministers will follow through.

    Recent OPEC comments have been divided, with ministers from Venezuela and Qatar suggesting there’s no need to boost supplies, while ministers from Indonesia, Nigeria and Kuwait say they’re still open to increases.

    Saudi Oil Minister Ali al-Naimi, possibly the most influential member of the cartel, has struck a neutral tone, telling reporters this weekend that “the field is wide open.”

    Another article offered up predictions by analysts not only of the inventory report, but also of whether OPEC would increase production:

    Oil rises, ends slide as OPEC hike seen unlikely

    A Reuters poll of 23 banks, traders and funds on Monday showed 12 participants did not expect OPEC to raise output. Late last week, a similar poll had 18 out of 24 participants expecting an increase of around 500,000 barrels per day.

    A poll of analysts by Reuters ahead of U.S. inventory data to be released on Wednesday showed crude stockpiles likely fell 800,000 barrels in the week to Nov. 30 due to the pipeline disruption. Distillate stocks were seen down 300,000 barrels and gasoline inventories up 1.3 million barrels.

    It’s funny how perception drives oil prices. A pipeline blows up, traders perceive a shortage, and the price spikes. Then, perceptions that OPEC will boost supplies drive prices back down. And the irony of course is that the pressure on OPEC to boost production is easing as prices fall – yet prices are falling because they are expected to boost production. That makes it hard to predict how strongly the market is going to react if they don’t.

    But at this point it appears that most members have come out against a production increase. If they decide against an increase, and the Fed cuts interest rates in a few days, we may yet make another run at $100 before the year is out.

    Upcoming EIA Conference

    Doug MacIntyre of the EIA dropped a note to inform us of an upcoming EIA conference on important energy issues. Doug was the former author of TWIP, and is now heading the division that does the EIA’s Short-Term Energy Outlook.

    Robert,

    Since this blog item is about the data EIA puts out every week, I hope you and your readers don’t mind if I plug an EIA Conference that will be held in Washington, DC on April 7-8. Session topics are varied, but include Peak Oil and other topics your readership might be interested in. The conference itself is free and has some very big names that have already agreed to be speakers. For more info, go to:

    http://www.eia.doe.gov/eia_conference_2008.html

    Doug MacIntyre, EIA

    Right now, I am scheduled to be in the U.S. during the first part of April, and I am hopeful that I can attend.

    December 4, 2007 Posted by | EIA, gas inventories, gas prices, oil inventories, oil prices, twip | 11 Comments

    Beginning of the Correction?

    It’s no big secret that I think oil prices ran ahead of themselves in the past couple of months. I don’t think they should have cracked $90 this year (and despite mass amnesia by analysts, as of August 99% were in that camp as well). But today, WTI traded into the $80’s for the first time in over a month. Of course prices may reverse before the close today (especially since it sounds like the Fed may cut interest rates again), or they may reverse next week. But I have a feeling that this is the beginning of the correction I have been expecting (and mentioned in this week’s TWIP).

    It’s not that I don’t think oil is inherently worth $100/bbl. My objection to the price had more to do with how fast the price changed. Oil ran up by over 30% in just a couple of months, and this does not allow enough time to establish the new supply/demand balance. Did the fundamentals change that much in just a couple of months? No. Yet every piece of bullish news drove prices up, and bearish news did not drive it down. But lately I have been warning that traders would be wise to heed the signs that supply was increasing and demand was falling.

    In spite of this, I was treated to an unending stream of rationalizations for why $100 was going to be a brief stop on the way to $150. Never mind that rising prices should be expected to moderate demand. Never mind that we hadn’t had enough time to establish the effect that $95 oil would have on demand. No, oil was going straight to the moon. I was told multiple times that speculators are not actually a factor – that the price was near $100 because of the fundamentals.

    Speculators who were “in the money” suddenly became very clever, and I got treated to several lectures on how supply and demand worked – and why that favored $100 oil. I was told that “inventories were plunging”, even though it was quite easy to confirm that they were at normal levels (having fallen from ultra-high levels). And these are the very same people who confidently told me earlier in the year that Saudi was completely tapped out – even though I was predicting they would raise production later in the year.

    But the tinfoil hat crowd is out in full force today. Because oil prices are down, I have seen suggestions that 1). The public is suffering from mass delusions; 2). Oil companies are manipulating the price; and 3). The government is manipulating the price. After all, “Peak Oil is here. How could oil prices fall? It must be manipulation and conspiracy.” Or, maybe Peak Oil is not here. That just doesn’t seem to enter the equation; that the supply/demand dynamics are changing. No, if you already know the answer – Peak Oil is here – then oil prices behaving contrary to that must have some other explanation.

    The big stories over the next couple of weeks will be the OPEC meeting on December 5th, in which members are expected to announce another production boost, and the Fed meeting on December 11th, where another interest rate cut is forecast. Those meetings should set the direction of oil prices for the rest of 2007.

    I think Saudi is going to have a tough time getting consensus on the production boost they reportedly desire, especially with oil prices already falling away from $100. There will probably be a compromise; perhaps a token production boost. Anything more substantial – 500,000 or more barrels per day – will probably put oil back in the lower $80’s. On the other hand, with oil prices down, the Fed may be more emboldened about making a bigger interest rate cut. Lately, each cut has been met with a falling dollar and rising oil prices. They may feel like they have a little more room to work with than they would have when oil was near $100.

    December is going to be an interesting month.

    November 30, 2007 Posted by | investing, oil inventories, oil prices | 27 Comments

    Two Dead in Pipeline Explosion

    This is one case in which I was a bit slow to process the information. I heard about this pipeline explosion not too long after it happened, but the seriousness was not immediately apparent to me:

    Explosion At A US-Canadian Pipeline Sends Oil Prices To $95.17 A Barrel

    It’s amazing to me how all the stories seem to treat the two deaths as an afterthought:

    New York, NY (AHN) – Oil prices soared up on Thursday by $4 following an explosion at a pipeline interrupting the supply of the crude oil to the U.S. Midwest from Canada.

    The fire that broke out late Wednesday cut Canadian oil supplies through the pipelines. Canada provides the U.S. with at least 15 percent of imported crude.

    Oh yeah, and two people died. Let’s briefly mention that, and get back to the supply issue:

    The explosion killed two workers fixing the Enbridge Energy Inc. pipeline in northern Minnesota. “It is a major incident with major supply issues in an important area,” Paul Horsnell, head of commodities research at Barclays Capital in London, told Bloomberg. “It will put pressure on prompt demand in the Midwest.”

    Due to the incident, four pipelines supplying 1.5 million barrels a day were closed till further notice, although the fire was extinguished.

    Maybe I am hypersensitive about that point, but it annoys me how we just so casually mention the deaths.

    The government is offering to tap the SPR:

    U.S. says oil reserve ready to offset pipeline blast

    WASHINGTON (Reuters) – The U.S. Energy Department said on Thursday it was prepared to make oil supplies from the Strategic Petroleum Reserve available to refineries to help offset the disruption in Canadian oil imports caused by an explosion at the Enbridge pipeline.

    “Crude oil from the nation’s Strategic Petroleum Reserve is available to alleviate a severe supply disruption and remains available if necessary,” a department spokeswoman told Reuters. She said the department is “reaching out” to Midwest refineries to assess their supply situation and see if they need oil from the emergency stockpile.

    She pointed out that the explosion occurred at one of the four Enbridge pipelines that was undergoing maintenance, and a second pipeline has shut as precautionary measure.

    However, the other two pipelines are currently moving more than 650,000 barrels of Canadian crude oil a day to the U.S. market, down from the four pipelines’ normal combined rate of 1.1 million barrels a day, the spokeswoman said.

    Did I mention that two people died?

    November 29, 2007 Posted by | accident, fatalities, oil inventories | 22 Comments