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Special Report -- NOESIS Forecasts
Several readers asked to see a comparison of the NOESIS forecasts against actual prices.
The following graph is an attempt to satisfy that request, although it does not provide
much useful information. The first NOESIS forecast was issued in December 1997 with a
warning that conditions were right for the price of crude oil to drop to at least $12.50
per barrel.
It was not until April 98 that a long term forecast was issued. The decision was made to create
a forecast for 34 API Gravity crude oil. This gravity was selected because it most closey
represents the combination of crudes refined by the U.S. Coincidently, Saudi Arabian Lt crude oil,
which served as the world marker crude oil for several years,
is also 34 API. Below is a graph comparing the U.S. refiner acquisition costs with Saudi Arabian Lt
prices for 1998.
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Along with that forecast was
a discussion about the nature and expected impact of forecasts. The text of this statement
has been posted since that time as a "background tip:"
Forecast Note: Beginning April 27, 1998 NOESIS will post graphs with crude oil and gasoline
price forecasts for the next 6 months (or more). Readers should remember that forecasts are projected based
on current data. In other words, if all else remains the same, the price "will do this."
However, from past experience we know that decision makers use forecasts to adjust their operations.
For instance, in 1983 a forecast was developed which showed the price of oil would go to $40+ per barrel
because U.S. refineries were extremely limited in their ability to refine crude oils of varying
API gravity and sulfur content. By the late 1980's most major refineries had undergone modifications
to allow them to process a wider range of crudes. The price of oil began to come down partially
because refiners could choose to refine heavier, higher sulfur crudes. And while prices did top
out at $40/bbl, they did not stay there.
NOESIS has readers from all of the major oil companies and most of the major crude oil producing
countries around the world. We hope readers will consider our forecast as they develop
their strategies. Obviously, if any or all of those companies and countries change their operating
strategies, the NOESIS forecast will no longer be accurate. Therefore, from time to time NOESIS
will update the forecast based on new information. Finally, investors -- please go back to the
Main page of this site and read the warning carefully.
The following graph shows the first Long Term Forecast, labeled here as "September Forecast" in
red. As discussed below, the near term forecast was modified in November, which is shown in
purple. Finally, the current Long Term Forecast, also discussed below, was
issued December 1998 is shown in blue. The 1998 prices for Saudi Arabia Lt (34) and U.S. refiner
acquisition costs are shown in yellow and pink, respetively. (note: colors may vary, depending on
the browser you are using, so check the key at the bottom of the graph)
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If a forecast does its job, a retrospective comparison of forecast to actual will not be useful
unless you consider what impact the forecast had on the overall system of supply, price and demand.
For instance, by June 1998 if nothing changed,
the price of crude oil was headed to $8.00/bbl. However, cutbacks in the production of crude oil,
coupled with increased seasonal demand in the summer sustained the prices. On reports of production
cutbacks, speculators drove the price of futures up in September, which brought spot prices up, and
thus crude oil contract prices increased.
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The NOESIS forecast was modified in September to account for these changes, but it still appeared
that the price of oil would dip significantly in December because refiners normally draw down
crude oil inventories to minimum levels at the end of their fiscal year. However, refiners
were remarkably creative
in sustaining production despite full tanks almost everywhere and made a critical decision to
maintain higher than normal, end-of-the-year, crude oil inventories.
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The near term NOESIS forecast was changed to reflect what appeared to be a move on the part
of refiners to maintain the price into January. As it turned out, refiners held off the
decrease in oil prices to mid December, at which point crude oil prices dropped suddenly.
NOESIS issued a new long term forecast for 1999-2001 in December 1998. The near term forecast
shows the price dropping again through February and into March (Blue line on the graph above).
The current forecast predicts a longer recovery period, primarily because refiners chose to retain
so much crude oil in inventories. For awhile, those inventories will provide a buffer between
supply and demand. Refiner's will have the luxury to pick and choose what crudes they want to
refine and thus prices will be driven by refiner's postings. (i.e., It's a buyer's market!)
If anyone is hoping to bring prices
under control, note that world crude oil production is definitely headed in the wrong direction.
Overall, the U.S. economy will benefit from continued long term low crude oil prices.
However, countries that depend on income from the sale of crude oil will continue to have
difficulties. An updated
chart showing the world crude oil cash flow is below.
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Weekly Report
Looking at the
4 week moving average, refinery utilization continues downward. However, for the week, inputs
to refineries increased
a small amount, from to 14.6 to 14.25 million barrels per day, for a utilization rate of 90.5%. Since
January 1997, the lowest utilization rate has been 88.0 %, which occurred in February 1997.
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Imports of crude oil increased slightly from 8.45 to 8.56 million bpd. Refiners continued
to build crude oil inventories, adding another 2.6 million barrels for a total of 332.8 million.
Refiners could still add as much as 20 million barrels to inventory. High levels of international
production will give them an opportunity to fill their tanks with the highest grade crude oils at
reasonable prices. Those refineries that shift to high API, low sulfur crudes will be able to
increase their throughput to crude stills and reduce refining costs due to a decreased need for
cracking. Thus, they will have a choice of reducing product prices further or benefitting from
higher margins. There is so much competition among refiners east of the Rocky Mountains, that
it is likely these conditions will lead to even lower gasoline and diesel prices. Hopefully, the
same thing will happen in the western states.
Gasoline stocks are plentiful. At a total of 223.1 million, they now exceed the high level in
February 1998 of 221.3 million. Imports remained strong, increasing from 382 to 540 thousand
barrels per day.
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Distillate inventories are still
too high. With forecasts of warm weather, comments received from industry indicate particular
concern, which is certainly appropriate. Total distillate inventories decreased only 200 thousand barrels from 144.3 to 144.1 million
barrels.
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W
orld crude oil prices reported
by EIA as of January 29, 1999: Saudi Arabian Lt (34 API) - $10.50, Nigerian Bonny Light
(37 API) - $11.40, Indonesia Minas (34 API) $11.10, UK Brent (38 API) - $11.04, Venezuela
Tia Juana Light (31) $11.10, Mexico Maya
(22 API) - $7.49, Mexico isthmus (33) $10.04, and
Russia Urals (32 API) $11.24.
Posted prices for crude oil as of February 7, 1999
were: Scurlock, West Texas Intermediate (WTI) $9.00; Louisiana Lt. Sweet Onshore $8.00,
Oklahoma Sweet $9.00; Refiner posted prices were: WTI (36 API) $11.00, Louisiana Lt. Sweet Onshore
$10.75, Kern River (13 API) $7.00;
Alaska North Slope (28 API) $11.18;
Kettleman Hill (34 API) $9.20 and Wilmington (17 API) $7.10
East Coast Gasoline and Heating Oil
East of the Rockies - Refinery activity was steady and production continued to
exceed demand for gasoline. All three regions, PADDS I, II, and III, added to their inventories.
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Distillate production was steady, and refiners were successful in pulling inventories down slightly,
but not enough to prevent operational constraints in the spring. It will be interesting to see
how this all works out.
Gasoline prices continued a slow trend downward: PAD I - $.91,
PAD II - $.90, and PAD III - 0.87.
Diesel prices on February 1 were:
PADD I - $.97, PADD II - $.94, and PADD III - $.94
FORECAST: Gasoline prices will remain low and may drop further with the price of crude oil
during late February and early March. Heating oil prices will decrease through spring as
refiners try to draw down inventories. If refiners don't move more distillate soon, some refineries
will be severely constrained when it comes to making product for spring demand. To a certain
extent, the problem can be controlled through the use of imported gasoline and current inventories
of gasoline. But if it comes to this, competition could get really serious, driving prices down
to new lows.
Rocky Mountain Gasoline and Diesel
Rocky Mountain - the price of regular gasoline remained at
$.96 per gallon and the price of diesel decreased to $.98 per gallon.
Rocky Mountain prices will continue to mirror changes in the price of crude oil.
West Coast Gasoline and Diesel Forecast
West Coast - Gasoline inventories were drawn down from 30.5 to 29.7
million back in line with levels maintained for most of the past year. Distillate inventories
increased while the retail price of diesel increased, indicating refiners may have created a
tight market by holding product in storage.
On February 2 the average price of (reg-mid-premium)
gasoline in PADD V was $1.13 per gallon.
The price of Regular in PADD V was $1.08 per gallon.
Reformulated gasoline decreased one cent to
$1.11 per gallon. In Sacramento, gasoline was spotted at an ARCO for $.99.
And within the areas
designated by the EPA as both an ozone and a carbon monoxide nonattainment area which requires the use
of oxygenated fuels program reformulated gasoline, the price of OPRG gasoline was $.94. On
the face of it, you would think EPA would want OPRG to be priced higher than any other fuel as
a deterrent to excess use of gasoline. On the other hand, if a car cannot get as good mileage on
OPRG than regular gasoline, perhaps the differential is justified.
The average price of diesel in PADD V dropped to $1.04 and Californian's are paying
$1.11 per gallon.
FORECAST: There are currenly no variables that can be used to forecast the price of
products in the West. Prices have been steady for months, but inventories are being drawn down,
so it is possible that a tighter supply may result in higher prices this spring.
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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