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
Very interesting post George!
In this post and many of your other comments you refer to refineries trying to reduce inventories of high priced oil.
I can't quite get my head around that.
Does the oil in storage not go up and down in price with the market?
Is it a cash flow issue?
Posted by: Jeremy | January 27, 2009 at 04:09 PM
Jeremy,
Refiners keep track of their oil on a last in-first out basis. At the end of the Calendar year, they value their inventories based on what they paid for them. So, if they fill their tanks with high priced oil and fail to remove it before the market price of oil drops, the price of new oil (last in) should be the basis of the products they are producing, leaving the higher valued oil in the tanks. I assume, if they stop buying new oil and process what is in their tanks, they would price products higher -- but then, competition in their markets may be a problem -- causing them to sell products at a loss.
In the past, refiners rarely filled their crude oil tanks when oil prices were increasing. This recent run is very different. Their inventories were very high about the time prices turned. -- George
Posted by: GeorgeClemen | January 27, 2009 at 05:50 PM
As nearly half our domestic and imported oil is consumed primarily in the form of gasoline to fuel personal vehicles, this is where we need to focus a great deal
of our attention and investment dollars.
gasoline
Posted by: gasoline | November 10, 2009 at 01:46 PM
Yes. Or we should find an alternative to the internal combustion engine that is extremely efficient - probably not electric or solar.
Posted by: George Clemen | November 10, 2009 at 06:55 PM