Noesis: Crude Oil, Gasoline and Diesel Stock and Price Forecast



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March 8, 1999 FOR THE CURRENT INFO ON RIG COUNT CHECK OUT THE BAKER HUGHES SITE
Weekly Forecast Report
Revised Crude Oil Price Forecast Data released this week presents an interesting challenge! Refiners increased the amount of crude oil imported from 8.780 to 8.949 million bpd -- that's an additional 1.18 million barrels for the week. They also reported decreasing inputs of crude oil into crude stills from 14.496 to 14.424 million bpd -- that's a decrease of 504 thousand barrels for the week. Refineries are operating steadily at about 91% utilization.

Just looking at the initial figures, the inventory of crude oil should have increased by 1.6 million barrels.(NOTE: this figure was incorrectly reported early Monday morning as .6 million) Instead, refiners reported lower inventories -- a decrease from 334.7 to 331.5 million barrels for a total drop of 3.2 million. There are three possible explanations: 1) there's an error in the data, 2) there is a HUGE leak in an oil tank, or 3) U.S. oil production was cut back from the EIA estimate of 6.2 million bpd to 5.7 million bpd.

In looking at EIA, API and other data, it does not appear that a reporting error occurred. And I'll choose to assume that someone would notice a spill of over 3 million barrels of crude oil. The third explanation, thus, is the most viable. If true, the oil companies found a great way use their vertical integration to manage the price of oil. By not buying their own local production (small producers reported to me that they did not see any decrease in demand), majors trimmed production rates enough to shift demand to imports, which is how they sustained import rates during the normally soft demand period in February. By increasing imports and dropping crude oil tank levels, they created the illusion of greater demand for crude oil at the same time that they were barely sustaining imputs to crude stills. It was a brilliant move! The illusion sparked an increase in the futures price of crude oil, which in turn forms the basis for the spot price of oil. While the oil companies had to pay higher prices for spot oil at the refinery, the price of their remaining production increased -- and the value of the oil they did not produce increased as well! U.S. oil companies essentially took over the "Saudi" position of swing producer. They did not have to cure the world production glut -- they only had to increase U.S. demand for foreign oil. Inventories stabilized and are in good shape for the spring run, which means it is now possible for crude oil prices to stabilize. Of course, this theory assumes one or more oil companies would purposely cut back production (or they all reduced production by 8%). Assuming the above analysis is correct, the new forecast for crude oil prices is shown in red, as compared to the previous forecast shown in blue.

There are potential pit falls with the current situation. First, there is still plenty of crude oil in the world and the small amount of trimming in U.S. production will have no significant impact on the broad supply situation. Second, in the current situation, the price of crude oil will be driven by the futures market. Since most of the buyers of crude oil futures do not take delivery on the crude they contract to purchase, you must assume that they will have to sell their contracts before they expire. The buying and selling will create a bumpy road ahead. Third, U.S. majors can probably recover production that was trimmed pretty easily, so they have some control over the supply situation in the U.S. and as the price rises to an acceptable level, they will increase the production and back out imports. In the end, we could see a balancing act between U.S. production and imports to maintain the price of crude oil at around $12/barrel. Of course, the range within which oil companies can make this situation work is limited by the nature of crude oil production (i.e. they probably won't be permanently shutting in wells to create demand). Finally, independent refiners will play an important role in keeping the price of oil in check. As long as they can purchase foreign crude oil at low prices, which they can reflect in lower product prices, the majors will be prevented from allowing the price of crude oil to just float to a higher level. We have an opportunity to see how effective this system of free market checks and balances really is. The current scheme presents the best of all situations. Prices at, or above, $12/bbl will keep most U.S. production on line, and should bring some stability to world markets. On the other hand, fields discovered recently that must be produced at prices above $12/bbl will remain on hold for the future. What does not appear to be on the horizon is a real shortage of oil or a real increase in the world demand for crude oil. Without one of these factors, there is no basis for the price of crude oil to significantly increase over the next few months. A final comment about the drop in U.S. production rates: At 5.8 million bpd, the U.S. is dependent on foreign oil for 60% of its total supply.

Getting Ready for Y2K? U.S. inventories of all products are currently higher than normal. And if refineries continue to operate at the 90% or higher level, inventories will remain high throughout the year. It would be strategically good for the U.S. to maintain the extra inventories, including high crude oil inventories, beyond January 1, 2000 as insurance against the Y2K bug.



I get a lot of mail about YK2, so here is my view. Although operating with high inventories tends to restrict the flexibility in refining, having the extra inventories next winter may help alleviate local problems that could result from Y2K bugs in scheduling and financing. Every production and refining system I ever worked with or inspected had manual backup. So I believe the basics of producing oil and refining it will not present problems that cannot be overcome. However, scheduling of crude oil and product shipments may be subject to Y2K problems if old programs are relied upon for scheduling. The biggest problem will be in the financial end of buying and selling. Trading crude oil and refined products around the world involves many ongoing, complex financial arrangements. The international banking system is heavily involved in these trades, and some computers in the U.S. and foriegn countries may not be ready by January 1, 2000. So while I believe production and refining will be OK, I think there is potential for significant disruption in scheduling, financing and trading, which could lead to anything from minor spot shortages to a total system shut down. Fortunately, the major oil companies are well aware of these problems and are not only working to insure their own computers are clear of Y2K problems, but are also developing contingency plans. There is probably nothing in the Y2K problem arena that cannot be overcome by good contingency planning. I think the oil companies are perfectly capable of managing this issue, and there is always the fall back of paper and pencil.

EIA U.S. Refining Data
Inputs and Imports are 4-week Avg
	Input/Output	Million BPD	Imports	Million BPD	Inventory	Million BBL
Week	Feb 19	Feb 26	Feb 19	Feb 26	Feb 19	Feb 26
Crude Oil	14.5	14.5	8.8	8.6	334.7	331.5
Gasoline	7.9	7.9	0.506	0.487	229.3	227.4
Distillate	3.3	3.3	0.300	0.293	141.4	140.2
Resid	0.7	0.7	0.217	0.253	41.7	41.0

W orld crude oil prices reported by EIA as of February 26, 1999: Saudi Arabian Lt (34 API) - $10.23, Nigerian Bonny Light (37 API) - $10.60, Indonesia Minas (34 API) $10.45, UK Brent (38 API) - $10.73, Venezuela Tia Juana Light (31) $9.73, Mexico Maya (22 API) - $7.86, Mexico isthmus (33) $9.65, China, Daqing (33) $10.25, and Russia Urals (32 API) $10.03.

Posted prices for crude oil as of March 4, 1999 were: Scurlock, West Texas Intermediate (WTI) $10.75; Louisiana Lt. Sweet Onshore $9.75, Oklahoma Sweet $10.75; Refiner posted prices were: WTI (36 API) $12.50, Louisiana Lt. Sweet Onshore $11.75, Kern River (13 API) $8.00; Alaska North Slope (28 API) $6.03 (est based on Feb 19 O&G Journal + posted increases); Kettleman Hill (34 API) $10.20 and Wilmington (17 API) $7.85 (est).

East Coast Gasoline and Heating Oil

East of the Rockies - Overall, the refining rate in Eastern (PADDI), Midwest (PADD II), and Gulf Coast (PADD III) were down from the previous week. Refineries in PADD III processed a bit more crude oil and those in PADDs I and II, ran at lower rates. Production of gasoline was down, which is very unusual for this time of year. Inventories of gasoline continued to increase and inventories of distillate continued to trend downward, but are still seasonally high.

Distillate production was down in PADDs II and III, but increased in PADD I. The total amount of distillate on hand remains high for this time of year. The amount of distillate in storage in PADD II is unusually high.

Gasoline prices on March 1, 1999 varied: PADD I - $.89, PADD II - $.88, and $.87 in PADD III.

Diesel prices on March 1, 1999 were up a little: PADD I - $.97, PADD II - $.94, and PADD III - $.93

The retail price of heating oil on March 1, 1999 was reported to be $.85 and the wholesale price was $.35.

FORECAST: Gasoline prices will increase with the price of crude oil, but may be forced back in Spring competition for market share in the Eastern and Gulf Coast markets.

Rocky Mountain Gasoline and Diesel

Rocky Mountain - Gasoline inventories remain high for this region at 7.9 million barrels, plus refineries increased gasoline production. So there should be no shortage going into the spring months. Distillate inventories are also higher than normal, especially for this time of year.

The price of regular gasoline remained at $.96 per gallon and the price of diesel was still at $.99 per gallon.

Rocky Mountain prices seem to be fairly stable, but diesel prices may drop if refiners have to lower tank levels over the next few weeks.

West Coast Gasoline and Diesel Forecast

West Coast - Inventories at the PADD V refineries are not as high as they should be going into Spring. However, refining rates were higher as of the 26th of February. The TOSCO refinery fire was on the 27th so the next set of data will show how well the system covered that shutdown. The March 1 price data shown below shows only a slight impact in prices right after the fire.

On March 1 the average price of (reg-mid-premium) gasoline in PADD V remained at $1.12 per gallon. The price of Regular was up one cent at $1.08 per gallon.

The average price of diesel in PADD V remained at $1.03 and Californian's are still paying $1.10 per gallon.

FORECAST: Prices in PADD V remain high with no prospect of them being driven down by competition any time soon. Inventories are low and refining rates are below their operating highs. The market continues to be well managed to sustain current pricing.

For a good graph of gasoline and diesel prices since 1997, take a look at the EIA graph.

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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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