Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Man Takes First Steps Towards Colonising Mars - Nasa Perseverance Rover in Jezero Crater - 25th Feb 21
Musk, Bezos And Cook Are Rushing To Lock In New Lithium Supply - 25th Feb 21
US Debt and Yield Curve (Spread between 2 year and 10 year US bonds) - 24th Feb 21
Should You Buy a Landrover Discovery Sport in 2021? - 24th Feb 21
US Housing Market 2021 and the Inflation Mega-trend - QE4EVER! - 24th Feb 21
M&A Most Commonly Used Software - 24th Feb 21
Is More Stock Market Correction Needed? - 24th Feb 21
VUZE XR Camera 180 3D VR Example Footage Video Image quality - 24th Feb 21
How to Protect Your Positions From A Stock Market Sell-Off Using Options - 24th Feb 21
Why Isn’t Retail Demand for Silver Pushing Up Prices? - 24th Feb 21
2 Stocks That Could Win Big In The Trillion Dollar Battery War - 24th Feb 21
US Economic Trends - GDP, Inflation and Unemployment Impact on House Prices 2021 - 23rd Feb 21
Why the Sky Is Not Falling in Precious Metals - 23rd Feb 21
7 Things Every Businessman Should Know - 23rd Feb 21
For Stocks, has the “Rational Bubble” Popped? - 23rd Feb 21
Will Biden Overheat the Economy and Gold? - 23rd Feb 21
Precious Metals Under Seige? - 23rd Feb 21
US House Prices Trend Forecast Review - 23rd Feb 21
Lithium Prices Soar As Tesla, Apple And Google Fight For Supply - 23rd Feb 21
Stock Markets Discounting Post Covid Economic Boom - 22nd Feb 21
Economics Is Why Vaccination Is So Hard - 22nd Feb 21
Pivotal Session In Stocks Bull Bear Battle - 22nd Feb 21
Gold’s Downtrend: Is This Just the Beginning? - 22nd Feb 21
The Most Exciting Commodities Play Of 2021? - 22nd Feb 21
How to Test NEW and Used GPU, and Benchmark to Make sure it is Working Properly - 22nd Feb 21
US House Prices Vaccinations Indicator - 21st Feb 21
S&P 500 Correction – No Need to Hold Onto Your Hat - 21st Feb 21
Gold Setting Up Major Bottom So Could We See A Breakout Rally Begin Soon? - 21st Feb 21
Owning Real Assets Amid Surreal Financial Markets - 21st Feb 21
Great Investment Ideas For 2021 - 21st Feb 21
US House Prices Momentum Analysis - 20th Feb 21
The Most Important Chart in Housing Right Now - 20th Feb 21
Gold Is the Ultimate Reserve Asset - 20th Feb 21
Is That the S&P 500 And Gold Correction Finally? - 20th Feb 21
Technical Analysis of EUR/USD - 20th Feb 21
The Stock Market Big Picture - 19th Feb 21
Could Silver "Do a Palladium"? - 19th Feb 21
Three More Reasons We Love To Trade Options! - 19th Feb 21
Here’s What’s Eating Away at Gold - 19th Feb 21
Stock Market March Melt-Up Madness - 19th Feb 21
Land Rover Discovery Sport Extreme Ice and Snow vs Windscreen Wipers Test - 19th Feb 21
Real Reason Why Black and Asian BAME are NOT Getting Vaccinated - NHS Covid-19 Vaccinations - 19th Feb 21
New BNPL Regulations Leave Zilch Leading the Way - 19th Feb 21
Work From Home Inflationary House Prices BOOM! - 18th Feb 21
Why This "Excellent" Stock Market Indicator Should Be on Your Radar Screen Now - 18th Feb 21
The Commodity Cycle - 18th Feb 21
Silver Backwardation and Other Evidence of a Silver Supply Squeeze - 18th Feb 21
Why I’m Avoiding These “Bottle Rocket” Stocks Like GameStop - 18th Feb 21
S&P 500 Correction Delayed Again While Silver Runs - 18th Feb 21
Silver Prices Are About to Explode as Stars are Lining up Like Never Before! - 18th Feb 21
Cannabis, Alternative Agra, Mushrooms, and Cryptos – Everything ALT is HOT - 18th Feb 21
Crypto Mining Craze, How We Mined 6 Bitcoins with a PS4 Gaming Console - 18th Feb 21
Stock Market Trend Forecasts Analysis Review - 17th Feb 21
Vaccine Nationalism Is a Multilateral, Neocolonial Failure - 17th Feb 21
First year of a Stocks bull market, or End of a Bubble? - 17th Feb 21
5 Reasons Why People Prefer to Trade Options Over Stocks - 17th Feb 21
The Gold & Gold Stock Corrections Are Normal - 17th Feb 21
WARNING Oculus Quest 2 Update v25 BROKE My VR Headset! - 17th Feb 21
UK Covid-19 Parks PACKED During Lockdown Despite "Stay at Home" Message - Endcliffe Park Sheffield - 17th Feb 21
How to Invest in ETFs in the UK - 17th Feb 21
Real Reason Why Black and Asian Ethnic minorities are NOT Getting Vaccinated - NHS Covid-19 Vaccinations - 16th Feb 21
THE INFLATION MEGA-TREND QE4EVER! - 16th Feb 21
Gold / Silver: What This "Large Non-Confirmation" May Mean - 16th Feb 21
Major Optimism for Platinum, Silver, and Copper - 16th Feb 21
S&P 500 Correction Looming, Just as in Gold – Or Not? - 16th Feb 21
Stock Market Last pull-back before intermediate top? - 16th Feb 21
GAMESTOP MANIA BUBBLE BURSTS! Investing Newbs Pump and Dump Roller coaster Ride - 16th Feb 21
Thinking About Starting to Trade This Year? Here Are Some Things to Keep in Mind - 16th Feb 21
US House Prices Real Estate Trend Forecast Review - 15th Feb 21
Will Tesla Charge Gold With Energy? - 15th Feb 21
Feeling the Growing Heat and Tensions in Stocks? - 15th Feb 21
Morgan Stanley Warns Gasoline Industry Is About to Become Totally Worthless - 15th Feb 21
Debts Lift Gold - Precious Metal Prices Will Rise on a Deluge of Red Ink - 15th Feb 21
Platinum Begins Big Breakout Rally - 15th Feb 21
How to Change Car Battery Without Losing Power, Memory, Radio Code Settings - 15th Feb 21
Five reasons why a financial advisor can make a big difference to your small business - 15th Feb 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

The Trouble with Refining Crude OIl

Commodities / Crude Oil Jul 13, 2007 - 06:10 PM GMT

By: Elliot_H_Gue

Commodities Earlier this week, I was invited on Canadian television to offer a real-time analysis of the latest weekly petroleum report from the US EIA. The Petroleum Status Report is released each week at 10:30 am EST, detailing exactly how much oil, gasoline and distillate is currently in storage in the US.

Sometimes, the report just isn't all that interesting nor does it always have much of an impact on market prices for crude and gasoline. But that certainly hasn't been the case this year.


The weekly status report continues to reveal a highly unusual and persistent problem developing in the US market for crude and refined products. Specifically, the US is absolutely awash in crude oil, yet it's experiencing a growing shortage of motor gasoline just as we enter the peak of the summer driving season.

And, more recently, the gasoline supply shortage is starting to have knock-on effects for supplies of another key class of refined products known as distillates. Key distillate fuels include diesel and heating oil. This will become a bigger issue as we head into the winter heating season; heating oil is still a key source of heat in certain regions of the nation, and the winter marks a season of heavy demand for distillate fuel.

Before we delve into the market for refined products, however, check out the chart of crude oil inventories:

TEL 070713 crude
Source: EIA

This chart includes four separate lines plotted over a 52-week time scale. The light blue line represents the five-year average of crude oil in storage, while the purple and yellow lines represent the five-year high and low of crude storage, respectively. Note the five-year highs and lows don't include data for 2007. The final dark blue line represents the progression of crude inventories so far in 2007.

On Wednesday, the government reported a drawdown in crude oil inventories of 1.4 million barrels, a significantly larger decline than was expected. However, this hasn't changed the broader picture for crude oil inventories this year. For most of 2007, crude oil inventories have remained at multi-year highs and far-above-average levels.

At first blush, this might seem totally incongruent with the recent action in crude. After all, oil prices have generally been climbing during the past few months and currently stand at well more than $70 per barrel. Typically, one would expect crude inventories that far above normal levels to put downward pressure on prices. And oftentimes a build-up in crude inventories signals weak oil demand.

But that's just not the case today. The problem this year has been a string of refinery outages and shutdowns. Refinery capacity utilization in the US stands at 90.2 percent for this past week. That means that the nation's refineries are operating at a touch more than 90 percent of their total rated capacity.

But the average refinery utilization for this time of the summer is far higher than that. Normally, at this time of year, refiners are working flat out to pump as much gasoline as possible for the summer driving season. On average, capacity utilization in July has run at or a little more than 95 percent.

In other words, the reason all that crude is welling up in storage is that the refineries just aren't operating well enough to refine the oil into gasoline. That's exactly why gasoline inventories look like this:

TEL 070713 gasoline
Source: EIA

This is the same basic chart I showed above for crude. However, note that gasoline inventories are currently at five-year lows for this time of year. Refiners were unable to build stocks at a normal pace in the spring because of all those refinery shutdowns. Therefore, gasoline stocks are at dangerously low levels at a time of peak demand.

The high crude oil stocks and low inventories of gasoline are both the symptom of a refining issue in the US. Global oil demand isn't slowing down one whit. In fact, the International Energy Agency (IEA) recently revised up its intermediate-term forecasts for global oil demand. The IEA also called into question Organization of the Petroleum Exporting Countries (OPEC's) ability to meet that demand in the coming years.

The final piece to this puzzle is the distillates inventories. Check out the third and final chart below:

TEL 070713 distillates
Source: EIA

I alluded to the distillates in my interview on Wednesday as well as in the latest issue of The Energy Strategist . Basically, because gasoline inventories are so low, refiners are maximizing their output of motor gasoline right now. This is necessary to keep up with demand.

As the chart shows, in a normal year the peak demand for distillates (heating oil) is in winter. This is when stocks tend to draw down. Refiners tend to build distillate stocks from April through September, ahead of the heating season.

This year, distillate stocks began the year at high levels. This was mainly a hangover from the warm winter of 2005-06 that lowered overall demand for heating oil. And a warm start to the 2006-07 winter also hit heating oil demand.

But distillate inventories haven't yet begun their normal seasonal build. From the above-average levels that prevailed early in 2007, distillate inventories are now at the average. And I suspect we'll continue to see a slower-than-average build in distillate inventories in the next couple months. The reason is that refiners will be transfixed on keeping on top of motor gasoline demand.

This could be a problem for next winter. Heating oil prices are already on the rise. And if inventories continue falling, we could see a dramatic spike in pricing as the winter heating season starts to kick in late in the fall.

The refinery problems that have been plaguing the gasoline market this year are likely to spread to next winter's heating season as well. This bodes well for continued strong profitability for the refiners, who benefit from high prices for gasoline and heating oil relative to crude.

Eventually, as refiners gradually start to come back on line, this will also bode well for crude oil prices. Those excess supplies of crude could disappear quickly as refiners seek to rebuild stocks to more normal levels. 
As I've written before, the US refining situation is behind the fact that US benchmark W&T Offshore crude is trading at a significant discount to European benchmarks such as Brent. Eventually, I expect W&T to close that discount and move toward its normal premium over Brent. I suspect this will happen at prices north of $80 per barrel.

And finally, a tight heating oil market bodes well for natural gas prices. Natural gas is another common commodity used to heat homes during the winter. Therefore, high heating oil prices tend to boost demand for gas.

By Elliott H. Gue
The Energy Letter

© 2007 Elliott H. Gue
Elliott H. Gue is editor of The Energy Letter , a bi-weekly e-letter as well as editor of The Energy Strategist , a premium bi-weekly newsletter on the energy markets. Mr. Gue is also associate editor for Personal Finance , where he contributes his knowledge of the energy markets.

Mr. Gue has a Master's of Finance degree from the University of London and a Bachelor of Science degree in Economics and Management from the University of London , graduating in the top 3 percent of his class. Mr. Gue was the first American student to ever complete a full degree at that university.

Elliott H. Gue Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules