Analysis of EIA Data
George Clemen - Margaret Clemen Felts
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Tuesday, August 10, 2010 - A review of crude oil inventory, production, refinery runs and imports reveals an error range in reported crude oil inventory changes of from .5 to 2.5 million barrels per reported week. With roughly 358 million barrels in inventory (excluding the strategic petroleum reserve (SPR), which has been held level for several months), the error ranges from .14 to .7 percent. Investors who use the weekly crude oil inventory draw or fill levels for investment decisions should keep in mind this level of accuracy. Generally, watching the overall fill level compared to the historic range, shown in the graphs by the yellow band is probably more instructive regarding the current status of the U.S. refining industry.
U.S. Crude Oil Inventories - US crude oil stock levels, including the SPR, were reported to have decreased 2.8 million barrels from 1087.4 to 1084.6 million barrels, but still 4.9 million barrels more than in inventory just 3 weeks earlier. The EIA graph below shows total U.S. inventory levels running well above the top of the normal range.
Contributing to the excess crude oil is the stock situation in PADD 2, which includes 37.8 million barrels of oil in the tanks at Cushing, Oklahoma, which is the price settlement point for West Texas Intermediate on the New York Mercantile Exchange. Just 1 year ago, the amount of oil in Cushing tanks was 33.3 million barrels and the price was about $70 per barrel. Today, the price is $82 per barrel.
When they run out of storage capacity at Cushing, what happens? Theoretically, prices would crash. A possible alternative would be for producers to shift as much production as possible to refineries, backing out imports. Since the world market has been soft for months without significantly impacting prices, price bulls might get a few more months out of this strategy. Meanwhile, the goal would be to allow a steady draw down of oil from the Cushing tanks. Vertically integrated companies might be able to pull this off under normal conditions at refineries. But, crude oil storage tanks are filled to capacity, in fact, it appears refiners are collectively reporting crude oil in storage beyond tank capacity. Another option is to slow crude oil production and reduce imports until inventory levels are pulled down. In a true market, these acts would trigger lower prices. But, since investors do not seem to readily react to changes in these two factors, industry may be able to hold crude oil prices level using this strategy.
Refinery Operating Rates - Refinery utilization for the US was up less than 1 percent at 91.6 percent, with the increases occurring in PADDs 2 and 3. PADD 5, the West Coast, decreased from 82.9 percent to 81.1 percent. For this region, the 80 % level is critical. Small refineries were closed long ago, leaving only a few large refineries. Generally, refineries are not designed to operate much below 80% capacity. To achieve lower rates, an entire crude still unit would have to be taken off line. Thus, balancing supply with decreasing demand to sustain high prices may get tricky in the near future from the refinery point of view. However, PADD 5 refineries are sitting on high inventories of jet fuel and distillate, while pulling down gasoline inventories. For awhile, they will be able to use downstream capacity to upgrade distillate and jet fuel to gasoline, as needed. This is a new strategy to maximize the use of storage tanks to maintain market prices.
U.S. Gasoline Inventories - The U.S. appears to be swamped in gasoline going into a low demand period this fall. Total stocks are reported to be 223 million barrels, up from 222.2 million the previous week. While the West Coast refiners were able to pull down inventory levels, PADD 3 is overloaded, with amounts that appear to be hitting the maximum storage capacity. In the face of lower demand from a slow economy, the end of summer travel, and the impact of green programs, refiners will clearly have to alter management of refineries and storage. Of course, reducing prices to the consumer would move product, but there appears to be a collective resistance to making products more affordable.
U.S. Distillate Inventories are higher than they have ever been right now at 146.2 million barrels, driven up by very high levels in PADDs 1, 3 and 5. In fact, the high levels reported for PADD 3, the Gulf Coast region appear to exceed tank capacity, making one wonder if there might be reporting errors, or if some sort of temporary storage is being employed (barges and tankers?). In a fully functional supply-demand market, the price of fuel oil should crash this season.
Kerojet - Typically, Kerojet inventories command little comment, remaining somewhat stable. However, US Kerojet (commercial jet fuel) stocks have increased to 6 million barrels over the normal level. The increase is almost all in PADD 3, an indication that refiners are maximizing every available bit of storage tank space in trying to maintain operating rates.
Generally, with inventories of all products as high as they are currently, either some refineries will temporarily reduce refining rates significantly, or close down -- prices should be plummeting soon.
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NOTE: All graphs reproduced from the EIA Weekly Petroleum Status Report
