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September Special Report - Crude Oil and Cash Flow
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November 16, 1998
Check back for a new report on November 23, 1998
SPECIAL REPORT - Competition on the West Coast (or lack thereof . . .)
The U.S. West Coast has always been a unique area in the world
when it comes to supply and demand for crude oil and refined products. There are no crude oil
or product pipelines in the U.S. which deliver crude oil across the Rocky Mountains to West Coast refineries.
During most of the first half of this century California produced enough crude oil to feed all
of the West Coast refineries. Just as production began to drop off, Alaskan North Slope Crude and
California Offshore came on line, providing a much needed safety net for the West Coast. It was
not until just a few years ago that it became evident that supplies will no longer sustain demand.
Environmental protection efforts have completely stalled exploration and additional
production from new fields offshore as well as in Alaska.
For years there has only been a small trickle of imports -- primarily Indonesian crude -- to the
Western Refineries. Lately, some crudes from South America have been imported. But overall, the
West is still self sufficient.
The refining system is also a closed system. No appreciable amount of refined products
are imported to the West Coast. And, although there are refineries in Alaska and Washington,
California refineries are the main source of refined
products supplied to western states.
Recent consolidation in the refining business in California seems to have eliminated
what little competition existed in the refined product market on the West Coast. Or has it?
In many ways it appears that the system today is not much different from the way it was in
1921 - 11 years after an antitrust suit forced Standard Oil of New Jersey to break up into
several companies. Some of the players have changed, but many have not. And the consumer complaints are
remarkably similar.
In the Report of the Federal Trade Commission on the Pacific Coast Petroleum Industry, Part II,
Prices and competitive conditions are described per Senate resolution 138,
Sixty-sixth Congress (November 1921) the concerns centered on price fixing and lack of
competition. Read more by clicking here . . .
Crude Oil
Despite the prospect of a possible attack on Iraq, the price of oil
remained fairly well controlled and even dropped on Friday. For NOESIS, this event - or lack of
an event - was a small victory. The past 14 months of
weekly reports provided some well needed education and information to bring sense to
this market. News and industry analysts accurately assessed the situation and
delivered well thought out explanations of the supply/demand situation.
As a result of this new found understanding, the price of oil has stabilized. The down side is
that it has stablized at a low level. In the past, a strong jump in the futures price could
actually drag the base price of crude oil up to a new level. The way it worked was that
futures prices were maintained at high levels long enough for spot crude oil to actually trade
at or near those levels. Since refiners tend to post their prices relative to the spot market
and since many long term contracts are tied to the spot price of marker crudes, the traded price
of all crude oils would tend to increase in response to the futures "jump."
In previous years, President Saddam Hussein has been able to force the price of crude oil to increase just by creating
the possibility of unrest in the Mideast. Even $1.00 per barrel increase would represent a
significant increase in income for Iraq. It didn't work this time.
Now, it appears that the world's producers really will have to reduce production to below demand
to cause a significant increase in the price of crude oil. Or demand must increase to match
production. Right now, sluggish economies world-wide are keeping demand in check. In this unusual
situation, U.S. refiners have more control than usual since they are creating what appears to be
the critical marginal demand. If they are true to historic operation, refiners would be cutting
back on imports and decreasing inventories for the year end count of crude oil on hand. They would
do this by reducing imports.
Crude oil imports to the U.S. are holding at about 8.4 million bpd. Last
year refiners dropped import levels from 8.4 to 7.7 million bpd and brought inventories down
19 million barrels by the end of December. But the refineries were operating at 97.2% capacity.
So far, refiners have maintained unusually high levels of crude oil in storage which is helping maintain
the price of crude oil. If they decide at the last minute to draw down those inventories, they
will have to decrease imports by at least 1 million bpd, which means there will suddenly be an
additional 1 million bpd excess crude oil on the market. The price of crude oil will drop.
The NOESIS forecast as shown here was recently revised to reflect a bottom price for crude oil
(34 API) at $11.75, slightly higher than the previous forecast.
The posted price of West Texas Intermediate dropped to $11.50 on Friday, suggesting that refiners
may go ahead and pull down inventories.
The increase in prices
shown on the NOESIS forecast at the first of the year has not changed from the previous forecast.
The price increase is anticipated to result from U.S. refiners
rebuilding their inventories, as they have in the past.
If, instead, refiners choose to maintain the current levels of crude oil in storage, the price will remain flat
until world production drops to below world demand. The NOESIS forecast will not be modified
until mid-December unless something dramatic happens.
U.S. Crude oil inventories were a mere 800,000 barrels lower than the
previous week. The decrease occurred in PADD V (defined on Index Page)
and appears to be a result of normal cyclic
crude oil storage management. Inputs to refineries increased from 14.6 to 14.9 million bpd, or
94.8% of capacity. The cold front that raced across the country this past week probably helped
relieve some of the pressure of full distillate tanks, so this week's data should show fairly
normal operations.
Gasoline inventories remain increased 1.6 million barrels to a total of 201.8 million barrels.
Production of gasoline increased to 8.26 million bpd. If production of gasoline continues to
increase, demand for imports will slack off.
As of this writing, distillate levels were still very high at a total of 145.2 million barrels.
Residual fuel oil inventories increased to 41.2 million barrels.
EIA U.S. Refining Data
Inputs and Imports are 4-week Avg
| Input/Output | Million BPD | Imports | Million BPD | Inventory | Million BBL |
Week | Oct 30 | Nov 6 | Oct 30 | Nov 6 | Oct 30 | Nov 6 |
Crude Oil | 14.612 | 14.905 | 8.300 | 8.364 | 340.0 | 339.2 |
Gasoline | 7.947 | 8.259 | 0.507 | 0.521 | 200.2 | 201.8 |
Distillate | 3.344 | 3.423 | 0.201 | 0.159 | 145.1 | 145.2 |
Resid | 0.721 | 0.704 | 0.292 | 0.274 | 38.8 | 41.2 |
World crude oil prices reported by EIA
as of November 6, 1998: Arabian Lt (34 API) - $12.45, Nigerian Bonny Light
(37 API) $12.00, UK Brent (38 API) $11.42, and Mexico Maya
(22 API)- $9.29.
Posted prices for crude oil as of November 14, 1998
were: Scurlock, West Texas Intermediate (WTI), $11.00; Louisiana Lt. Sweet Onshore $10.00,
Oklahoma Sweet $11.00; Kern River (13 API) $8.50; Kettleman Hill (34 API)
$11.55; and Wilmington (17 API) $9.50
East Coast Gasoline and Heating Oil
East of the Rockies - Production of gasoline increased last week.
Stocks of gasoline in the PADDs I, II and III increased by 1.7 to 167.6 million barrels.
Storage levels in PADD I came down another 1.4 million barrels for a level of 72.6
million barrels. Plentiful supplies and competition in the distillate market appears to be holding prices down.
Gasoline prices have been very stable lately. EIA reported gasoline prices per gallon
for Regular on November 9 were as follows: PAD I - $.99,
PAD II - $1.00, and PAD III - 0.95.
Diesel prices on November 9 held steady at:
PADDs I - $1.03, PADD II - $1.02, and PADD III - $1.01.
FORECAST: Gasoline prices will follow the price of crude oil, while competition among the
many eastern refiners will keep oil company margins slim. The recent cold snap should result in
a drawdown of distillate inventories which, in turn, will allow the refiners to make more gasoline,
which will keep prices low for the time being.
The price of heating oil should remain low through the winter of 1998-99.
Rocky Mountain Gasoline and Diesel
Rocky Mountain - the price of regular gasoline decreased from $1.10
to $1.08 per gallon and the
price of diesel remained at $1.10 per gallon.
Prices will probably mirror changes in the price of crude oil.
West Coast Gasoline and Diesel Forecast
West Coast - Crude oil input to refineries remained at 2.6 million
bpd. Stocks of crude oil decreased from 61.1 to 59.7 million barrels.
Gasoline inventories remain even at around 27 million barrels, which is low for PADD V. A glitch in the
system, such as a refinery outage, could easily result in a temporary shortage and price increases.
Since refiners are not building inventories, it appears that none of the majors are scheduled for
significant down time this winter.
Prices at the pump have not changed significantly for the past few weeks.
On November 9 the average price of (reg-mid-premium)
gasoline in PAD V was still $1.17 per gallon.
The price of Regular in PAD V dropped to $1.12 per gallon.
The average price of diesel in PAD V remained $1.10 and Californian's are paying
$1.18 per gallon.
FORECAST: The price of gasoline and diesel are expected to mirror increases/decreases in crude
oil to the West Coast in the near term. The posted price of crude oil at West Coast refineries
decreased last week. An important supply to watch over the next couple of years is
Alaskan North Slope (ANS) Crude Oil.
The ANS link takes you to a great web site to monitor which is found at
http://www.revenue.state.ak.us/oil/index.htm.
Many readers write in and ask for more data or specific information. You are encouraged to explore
the NOESIS Index Page and the Links Page. The
links listed have been especially selected to get you to data and information which will supplement
the information you find on the NOESIS site. They are all great sites! For EIA data used in these
forecasts, select the Energy Information Administration link. Once there, select Petroleum. Then
select "Weekly Petroleum Status Report" The TEXT version gives you basic data. Or scroll down
and select pdf, text or html files for tables and graphs. There is a wealth of information on
the EIA site. With the analytical tools you've picked up by reading the NOESIS reports, you should
be able to use most of the data! As always, if you have questions, send email.
contact George Clemen at NOESIS
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