George Clemen - Oil-gasoline.com

EIA Data Analysis - March 18, 2009

George Clemen is on Twitter @gclemen! 

Data released by the EIA today shows that US refinery operating rates decreased for the third week in a row. Refiners are only using 82.1 % of operable capacity, a very low rate in the history of US refining and a reflection of very soft demand.

Meanwhile, refiners have filled crude oil tanks to high levels. Crude oil inventories . At a total of 353.3 million barrels, inventories are the highest since the peak in June 2007 and are above the highest point of the average range recorded by the EIA.  St a total of 34.5 million barrels, stocks of Cushing Oil continue to build in PADD II. In addition, the government has been adding crude oil to the Strategic Petroleum Reserves (SPR). Since there were no imports to the SPR, the filling rate is either a result of continued fill policy through contract (oil instead of royalties) or replacement of oil that may have been provided to refiners after the gulf coast hurricane. If it is royalty oil under the Bush administration plan, the purchases may explain the recent rise in oil prices. (See previous writings in this blog for details.)

Gasoline inventories are normal, Gasoline Inventories with some available capacity. However, distillate inventories are extremely high,Distillate Inventories which puts pressure on the refiners to alter normal refining patterns. Although refiners are trying to hold operating rates above 80%, it is unlikely they can continue much longer if demand for gasoline and distillate continue to decrease. We know demand is decreasing because product inventories are increasing despite reductions in imports and reduction in refining rates.

Refiners will optimize production rates to make the best of a bad situation and will begin to upgrade distillate to gasoline so they can utilize remaining gasoline storage capacity. When those tanks fill up, refinery operating rates will have to decrease.

In the 1980's when demand dropped, the US refining industry was able to accommodate the decrease by shutting down small refineries. In fact, over a period of about 10 years, as significant amount of capacity was shut down permanently. Then, as demand returned, capacity was added to the big refineries. The question now, is whether or not the big refineries can may incremental decreases in feed rates as demand pushes the industry below 80%. It could be that at some point a major refinery would have to shut down, allowing the other refineries to increase their rates. This situation could happen because refineries are designed to operated 24/7 at specific pumping rates (within a range). Below the design minimum, the entire refinery has to shut down. While a shut down of a refinery in itself will not impact the supply of product -- it will impact the owners of the refinery that goes down. Keep a close eye on independent refineries. They are particularly vulnerable to this type of scenario.

Generally, data indicate continued slump in demand and no justification for increases in crude oil prices recently or in the near future. It seems almost miraculous that prices are holding in the $40+ range, especially since there are confirmed tankers full of crude oil still available for sale on the international market. Sustaining crude oil prices above $45 per barrel is especially important to support alternative energy projects. The last time we found ourselves in this situation, over a period of just 5 years, the US implemented conservation measures and moved toward alternative energy enough to depress demand by as much as 14%. Unfortunately, the drop in demand triggered a concurrent drop in crude oil prices, which languished for years in the $18-$30 range. On the bright side, it seems that once crude oil prices hold for more than 2 years above a certain price, a new base is established. If past experience holds on this point, we may at least have a new base around $40. Oil price history

EIA Data Analysis -- Overload in Cushing - January 15, 2009

A quick look at the EIA data shows crude oil inventories in PADD II have been building since October 2008, increasing steadily from 60 million to the current 80.9 million barrels. Almost a third, 33 million of the total is in Cushing tanks. Cushing crude oil is sold on the futures market and this huge build appears to be depressing the futures prices. US refineries on the Gulf Coast would ultimately receive most of the PADD II production not refined in PADD II refineries. But Gulf Coast (PADD 3) refineries apparently had a higher priority of refining the very expensive crude oil they had in their tanks, to allow them to fill up with much less expensive crude oil.

Gasoline and diesel prices decreased around the time of the election, then popped back up for the holiday season, helping refiners recover some of the losses on refining high priced crude oil. It remains to be seen how US refineries will manage crude oil inventories going forward. Those that believe prices will continue to decrease will buy just enough to stay even of continue to draw down inventories to an operating minimum level. Those who think this is the bottom and prices will be going up, will try to fill their tanks quickly.

No matter what the strategy, the bottom line this week is that the US has plenty of crude oil on hand. Refinery operations have been in the mid 80 percent capacity for months. Over the past two weeks, They increased utilization from 14.19 to to 14.59 million barrels per day, or 85% capacity. Demand for products did not increase, so excess products went to storage. Inventories of gasoline, blending components, jet fuel, distillate and residual fuel increased. Imports of all products, except residual fuel, were lower. See Report

PADD III gasoline and distillate tanks are full. PADD II distillate tanks are well above normal. The frigid cold front in the east and Midwest may result in extra demand that could help bring the refinery inventories back into balance. If not, refinery rates will decrease.

February is typically a time for refineries to shut down and repair since this is the time when demand for all products is seasonally low. A lot of work has been done to most of the refineries over the past 3 years, and there was a significant drop in operating rates in the last quarter of 2008, so the drop in refining rates this winter may not be very significant. Shutdowns in this market will only exacerbate the drop in crude oil prices.

World-wide crude oil production is not likely to slow down as fast as everyone wants it to. Those producing countries that were planning on $140+ oil to meet their budgets are facing a severe shortfall in income and could easily push more production into the market to try to make up the difference. Saudi Arabia is typically the swing producer, ready to adjust its production to balance supply to demand. But, they may not be willing to reduce their production low enough to stop the flood on the market of other crudes since they themselves need to receive at least $55 per barrel to support their economy.

Historically, the US will stay on the energy conservation track for at least 2-3 years after a price shock like the one we just experienced. With the addition of a global downturn, international demand for fuels will also remain depressed. The price of crude oil could easily continue its free fall to $20 per barrel or lower, but will eventually bounce back, probably in the range of $30 to $45, where it may stay for several years -- just below the price necessary to justify continuation of energy conservation projects. Looking back, the time between crude oil price peaks is consistently 8 to 10 years. -- George

November 20, 2008 - Danger of Price Slide

Predictably, the price of crude oil slid down quickly as the U.S. presidential election approached. Also, predictably, oil refineries drew down inventories and are now in the process of refilling them with lower priced crude oil. This process is all good news for the U.S. consumers because gasoline and diesel prices will drop. Unfortunately, prices for heating oil supplied to the northeast might remain high in some areas, depending on how much higher priced heating oil remains in storage at the local storage facilities (intermendiate suppliers).

The danger of the crude oil price slide is an over-correction. The market is already well supplied. Although a drop from $145 to $50 per barrel will definitely slow production of some U.S. fields due to high cost of production, foreign oil sources, especially OPEC, can still profit significantly at prices below $20. Those countries that have been receiving huge inflows of cash for production may well forego the call to restrict production and, instead, will attempt to increase sales to make up for lost revenues as prices plunge. The potential is a flooded market and an unchecked slide in prices. International data runs 3 to 5 months behind, so even though OPEC may agree to cut back production, it is not uncommon for members to fail to comply with their quotas without early detection.

Like other times following crude oil price spikes, low to moderate prices may hold for up to 8 years. Alternative energy proposals may be shelved and the aggressive efforts toward controlling global warming could be significantly inhibited for the next few years, especially if prices sink below $45. - George Clemen

Gasoline Inventory Management 101 - August 14, 2008

It appears from oil prices today, that everyone figured out that the drop in gasoline inventories at US refineries is a normal strategic move when crude oil prices are expected to decrease. Refiners operate on a first in-first out accounting method. Thus, if they build gasoline inventories using less expensive crude oil, they effectively (theoretically) "trap" high priced gasoline (and diesel) in their tanks -- which becomes important when end-of the year accounting occurs. Thus, gasoline inventory management 101 lesson number one: when crude oil prices drop, move all of the high-priced product in refinery inventory to market as soon as possible, even if you have to temporarily reduce production rates - or lower import purchases. The temporary impact for the consumer will be extended high prices at the pump -- potentially followed by a decrease in prices as lower crude oil prices encourage competitive wholesale pricing. - George

Do Hurricanes Matter?

If you check the US data, you will see that even the worst hurricanes in the Gulf of Mexico have had no significant impact on the supply and demand balance for crude oil or refined products in the US. When a major storm hits, rigs are temporarily shut in, tankers slow down to avoid the storm, and refineries may shut down. But all of this happens at the same time consumer demand turns down dramatically in the affected regions. Even during Katrina, it was perfect that the refineries stayed down for awhile, because all of the cars, gasoline stations and roads were also inoperable!

All this is just to point out how rediculous it is for traders in commodities to point to storms as a reason for prices of crude oil to increase. - George

Oil Reserves - What's the Real Story?

Just this morning, as I read in the Wall Street Journal how Bear Stearns turned to dust overnight, leaving all of its employees and investors wondering what happened, I tried to imagine what will happen when the oil bubble bursts. Who will be the winners and losers? How fast can it crash? Oil prices are truly resting on a paper tower right now. Anyone holding futures who does not have an empty storage tank on the end of a dock (or the right pipeline) is not going to be taking delivery. Even if you could snag an empty barge, you would have to get it to the right place, and figure out how to get the oil you own into the barge -- and you will rapidly find out that there is no one in the oil industry that will go out of their way to help you accomplish this. When prices turn, everyone must cash out or watch the investment go to zero. That's a pretty scary image.

Anyway, since everyone seems to be buying the stories propagated by popular news media about the impending shortage of oil, I thought it might be helpful to add some alternative sources of information illuminating the more likely scenario that there is plenty of oil to support projected growth. And, even at $50 per barrel, we should be able to develop and transition to viable alternatives without suffering a shortage.

In the May 2008 issue of The Journal of Petroleum Technology, a publication of the Society of Petroleum Engineers (http://www.spe.org), there is a short version of a paper presented at the   2007 Annual Technical Conference and Exhibition. The paper is titled “Assessing Past, Present, and Near Future of the Global Energy Market”, by Roberto F. Aguilera, and analyst for Wood Mackenzie in Edinburgh,  and Roberto Aguilera, a Professor and ConocoPhillips-NSERC-AERI Chair in the Schulich School of Engineerging at the University of Calgary and a principal in Servipetrol. In this paper, the results of a comprehensive model of the Global Energy Market (GEM) are reported, based on the “current” oil prices (2007). The model could be used to determine the urgency of moving from crude oil to alternative sources of energy. The time horizon selected for the model is 2030.

Excerpts:

“Recent work suggests that there are enough hydrocarbons, available at production costs far below current oil prices, for society to substitute alternative sources before depletion becomes a problem . . .

“A key question is whether there are enough resources to satisfy consumption rates. The answer is positive based on research conducted using a variable-shape-distribution (VSD) model, validated by successfully comparing calculated and actual recoverable hydrocarbon volumes published by the US Geological Survey.

“Once the model was validated, it was used to estimate the recoverable conventional hydrocarbon volumes of the 937 petroleum provinces of the world, out of which 528 had not been evaluated previously. These results indicate that there are enough recoverable hydrocarbons to satisfy energy requirements for the next several decades. In our opinion, this will provide sufficient time for society to substitute other energy sources, perhaps unconventional or nonfossil.”

To their credit, the authors acknowledge that successful transition ultimately depends on whether adequate investment in alternative sources takes place on a timely basis and that there will always be the potential for events to cause temporary shortages. But, generally, they conclude that supplies are adequate to meet forecast demand, based on the growth in the world population (including increasing consumption rates per capita). If they were able to arrive at this conclusion at the 2007 price of crude oil, imagine what they would find at today's price!

What does OPEC See?

“The global reserve/resource base can easily meet forecast demand growth for decades to come. Estimates of ultimately recoverable reserves (URR) have increased over time, with advancing technology, enhanced recovery and new reservoir development. For example, according to an established industry source, reserve growth from improved recovery alone in existing fields amounted to 175 billion barrels in 1995–2003; combined with new discoveries of 138 billion barrels, total reserve growth was therefore well above the cumulative production of 236 billion barrels for that period. Moreover, technology continues to blur the distinction between conventional and non-conventional oil, of which there is also abundance, as well as with other fossil fuels. We expect the world’s URR to continue to increase in the future. Therefore, the real issue is not reserve availability, but timely deliverability, and here enhanced cooperation and dialog among all parties is essential to ensure security of demand, as well as security of supply.” http://www.opec.org/home/PowerPoint/Reserves/Conventional.htm

For your further enjoyment, here's some more great links: 

Is the World Running Out of Oil? http://new.api.org/aboutoilgas/security/upload/AreWeRunningOutofOilEPorter.pdf

http://www.cera.com/aspx/cda/public1/news/pressReleases/pressReleaseDetails.aspx?CID=8444

OPEC’s view of WORLD OIL RESERVES: http://www.opec.org/home/PowerPoint/Reserves/OPEC%20share.htm

Who Buys OPEC Oil?

http://www.opec.org/library/Annual%20Statistical%20Bulletin/interactive/FileZ/worldmapz.htm

In The US: Williston Basin, etc. http://pubs.usgs.gov/fs/2008/3021/

Russia: http://pubs.usgs.gov/fs/2008/3020/

Artic Resources: http://energy.usgs.gov/arctic/

Stranded Gas Technology to Boost US Production: http://www.netl.doe.gov/publications/press/2007/07061-Creating_Energy_from_Waste_Gas.html

A U.S. Department of Energy (DOE) project is turning "stranded" natural gas at marginal, or low-production, oil fields into fuel for distributed electric power. The breakthrough is bringing previously idle oil fields back into production and could boost domestic oil production by some 28 million barrels per year within the next 10 years, helping to reduce the Nation's dependence on foreign oil sources.

And a friend just sent this one in: http://www.gasbuddy.com:80/gb_gastemperaturemap.aspx

--George

Myths Driving Speculation

May 6,  2008 -- The pace of spinning up the price of crude oil is accelerating, possibly to the last leap upward before it crashes. Afterall, $200 per barrel oil, as forecast by a major investment house today, is no way for the Republicans to win the election in November.

Someone sent me the following link. This article is very much on point. The entire system of pricing is a bit more complex, but their comments about the integration of the markets and unregulated speculation are important. http://www.globalresearch.ca:80/index.php?context=va&aid=8878

Here's a few comments regarding stories investment analysts are telling to drive prices higher:

Russia's production is decreasing - an indication of an impending shortage. Wrong. Think of it this way: a producer cannot produce oil unless there is an immediate demand. Since the world's Strategic Reserves are nearing capacity, and few refiners are willing to try to operate with tanks full of $120/bbl oil, production around the world must necessarily be reduced to match demand. And at $120/bbl, demand is diminishing, not increasing. Thus, production MUST decrease -- and it is. The result? more oil in the ground for future production -- i.e. EXCESS SUPPLY

Supply disruptions on single oil fields will cripple crude oil supply. These type of disruptions have been happening since oil was first discovered. In general, world oil production is operating below capacity right now. So a loss of production in one place will be made up from another source. Unlike the situation in the 80's, most refineries are now able to refine a wide range of crude oils, making it easier to substitute one crude oil another.

A million barrel decrease in US inventories is an indication of shortage, justifying an increase in prices. This rationale is clearly unsubstantiated hype. A million barrel decrease can be explained by one tanker that has not docked yet to unload its inventory. Theoretically, oil and product suppliers could swing the data by simply slowing down or speeding up tankers so deliveries arrive before or after the day of reporting to the EIA. Furthermore, refineries would not normally fill their tanks with high priced imports unless they were sure the price would continue to rise. On the other hand, vertically integrated oil companies do want to receive all of their domestic production at maximum price. It's a balancing act to optimize profits that has nothing to do with the overall availability of crude oil in the world market.

Low product inventories mean there is a shortage of products. If you take a look at the inventory management right now, you will see that refiners have drawn down product inventories, a possible indication that they want to be positioned to refine oil at maximum rates to draw down crude oil inventories fast if and when prices turn. They will buy oil to refill tanks as prices decline. Theoretically, as refineries buy more oil, reports of increasing inventories should push oil prices down, although recently investment advisers have been successfully in spinning stories about the "increase in demand" to the news media that sustained of speculation upward despite the data. EIA Data (scroll down to "figures")

There is an overall shortage of crude oil. Actually, the world has plenty of oil. In it's annual report, Exxon reports 40 years of proved reserves -- a situation that certainly would not light a fire under the company to go out and confirm more of the reserves they have already identified, but not fully quantified at market prices (proved).

Asia and China are driving demand beyond supply. Wrong again. While China did build a new, big refinery that needs imported oil, it will be years before they build out a network of roads and sell everyone cars to the extent that their demand will be significant as compared to US and other OECD demand. Asia still needs roads and cars too.

The EIA Short Term Demand Forecast: http://www.eia.doe.gov/emeu/steo/pub/3atab.pdf - shows World Supply is expected to outpace demand for 2009, realizing of course, that ideally, supply of a liquid product would match demand as closely as possible.   

Turning the Tide on Speculation

March 4, 2008 - Speculation on crude oil futures is rooted in the belief that crude oil resources are diminishing.  Investors are so drawn to this story that futures contracts for just 5 years out are selling at a premium, well above today's prices.

OPEC representatives recently noted that demand for oil is actually declining and world inventories are full, making it appropriate to slow down production. But they are hesitant to do so because lower production rates will be used as an excuse by speculators as proof that we are running out of oil, and reason to push prices higher.

The most obvious way to turn the tide on current price run-up and to stabilize prices relative to real supply and demand fundamentals is to reveal the amount of oil known to exist that can reasonably be produced at $100/bbl. All reservoir engineers in the industry know the figures, because that is what they do -- estimate reserves based on current market prices. But things got weird a couple of years ago -- prices began escalating so fast, that no one would dare revise reservoir estimates based on those inflated prices -- the numbers just get too huge. Companies just quit adjusting the estimates in their annual reports (well, BP did report the viability of the Canadian Tar Sands).

To avoid a total melt down in the futures markets, maybe the engineers should add some qualifying factors, or provide the estimates at $60 per barrel instead of $100 per barrel - to temper the truth.

Anyway, oil producers should collectively answer the question: how much oil can be produced from known resources worldwide at $60 per barrel? If the futures market accurately mimics real market supply and demand for oil, such information should cause prices to go lower.

If futures prices continue to rise after traders see how much oil there is and how long it will last, then someone needs to take a good look at how the futures market for oil is designed and fix it.

Just some thoughts to consider ----------------- George

Analysis of EIA Data

by George Clemen, Industry Analyst

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February 27 , 2008

EIA refining data shows crude oil inputs to crude stills remain low due to slack demand and the usual February maintenance cycle. It's impossible to argue that the short term shut downs of refinery capacity from accidents and/or maintenance is impacting supply because, despite the lower rates, refiners continued to build gasoline supplies. Refinery Operable Capacity reported by industry has not changed for months. It remains at 17.436 Million Barrels per day. During February, refineries were operating at about 84.5 percent of that capacity. Last week, crude oil inputs were 14.624 million barrels per day. Input graph

Refiners are adding to crude oil inventories at a pace similar to the average for past years. To see figure, go to www.oil-gasoline.com

In the past week, refiners added 3.2 million barrels of crude oil to inventories despite a slight reduction in imports and a slight increase in crude feed rates to the refineries. Thus, the build resulted from increased receipts of DOMESTICALLY PRODUCED crude oil, to the economic advantage of US production companies. Crude Oil Stocks The bulk of the increase occurred in PADD 3, the Gulf Coast region, possibly signaling higher receipts from offshore.(What's a PADD?)

Refiners added 2.3 million barrels of gasoline to inventories, bring the level to 232.6 million barrels. Gasoline Stocks This build in inventories occurred primarily in blending stocks -- components of finished gasoline. The extraordinarily high stock levels may make refinery operations somewhat difficult in the near term until the levels are brought back down into the normal operating range. (Think about trying to pour coffee into several full cups) If oil companies insist on holding the line on high gasoline prices, they will have to decrease refining rates or shift emphasis to distillate, which seems the most likely near term solution.

Distillate inventories were drawn down 7.1 million barrels during February to a total of 120 million barrels, leaving room for new product. Distillate Stocks . Except for PADD V, refiners in all other regions are on pace to build distillate inventories early this year. Of course, should gasoline demand take off, which seems highly unlikely, distillate can be upgraded to gasoline.

PADD V, West Coast, refiners have a problem -- way too much product on hand. Imports are at zero, so the only possible adjustments are to either reduce refining rates further, or drop wholesale prices, hoping to move more product. In the current economy, the consumer may be buckling down, so a small price drop may have little impact.

Overall, holding product prices high will push consumers toward conservation, alternative transportation and less spending on other items. One can make the case for forcing the consumer in this direction by looking at the U.S. dependence on crude oil. Last week, the U.S. refined 14.63 million barrels of crude oil. 9.96 million barrels were imported. Thus, the U.S. is dependent on foreign sources for 68 % of its oil. So, while product imports are low, and refining rates are low, it is still the case that we need to take immediate steps toward a more secure energy future.  - George

www.oil.gasoline.com

Analysis of EIA Data - January 16, 2008

Analysis of EIA Data

by George Clemen, Industry Analyst

January 16 , 2008 - EIA refining data shows crude oil inputs to crude stills popped up in early January, resulting in a build in gasoline and distillate stocks, followed by a decrease in utilization rates from 91.3 to 87.1 percent this past week. Decreases occurred across all PADDs, so the decrease can be attributed primarily to a drop in demand as opposed to shut downs for maintenance. However, refinery turnarounds (maintenance) usually occur between late January and mid March, so refining rates are likely to decrease a bit more in coming weeks. (What's a PADD?)

Refiners are positioned perfectly going into the winter maintenance period with plenty product in inventory and very soft demand. Crude oil inventories grew by 4.3 million barrels to a total of 287.1 million. Of the 4.3 million, 1.6 million went into the Strategic Petroleum Reserves (SPR). Current refining rates and inventory levels mirror those of winter 2002, when prices were just tipping $28.50 per barrel.

Crude oil imports increased, reflecting the purchase of crude oil for the SPR under the federal program to exchange offshore royalty crude oil sent to US refineries for imported foreign oil purchased by US companies for the SPR.

Finished gasoline and distillate production were lower due to the lower refining rates. And product imports remained very low -- almost all of them coming in through east coast (PADD I) refineries and ports. Despite low operating rates and low imports, refiners managed to build product inventories significantly, indicating a sudden drop in wholesale demand. Total gasoline stocks increased by 2.2 million across the country. More interesting is the build of 6.2 million barrels of gasoline blending components over a 4 week period, of which approximately 85% was RBOB with Alcohol (Reformulated Blendstock for Oxygenate Blending), suggesting an overabundance of this stuff in the supply chain.

Total distillate stocks increased by 1.1 million barrels overall, but PADD V had an extraordinary increase in distillate inventories -- high enough to be unbelievable -- at 15.6 million barrels, where 13 million has historically been the peak operating level. Consumers appear to be rejecting California's high diesel prices.

Finally, note that U.S. crude oil production continues it's slide downward. This month it is 2.2 million barrels per day lower than a year ago, increasing U.S. dependence on foreign oil. And as the old oil fields play out, the balance of the natural gas reinjected in various fields over the years is being produced. Note that natural gas liquids production is up 2.3 million barrels per day from a year ago.

Please visit www.oil-gasoline.com for text with links to graphs . . .