Oil Analysts' Forecasting Average (1-for-4) Holds

By Brad Zigler

If you were surprised by the Tampa Bay Ray's elevation to the World Series, you should know that some things are immutable. One of them is the batting average of oil analysts in forecasting the weekly oil inventory numbers published by the U.S Energy Information Administration (EIA). They've been 1-for-4 for so long in their calls for crude oil, gasoline and distillate fuels stocks, as well as refinery utilization, they might as well just phone it in. Oh, wait. They DO phone it in.

On the last call, analysts expected crude oil inventories to rise by 2.4 million barrels. Instead, EIA reported a jump of 3.2 million barrels. At 311.4 million barrels outside the Strategic Petroleum Reserve, there now seems plenty of oil for this time of year. The recent price trend, in fact, seems to indicate that there's too much. Crude prices slipped nearly 8% since the last EIA report and have swooned 29% for the year.

Refineries were busier last week than analysts expected, too. The bean counter consensus for capacity utilization was 83.1%; the actual number was 84.8%. Refinery utilization has averaged 85% this year.

Calls for a 2.8-million-barrel increase in gasoline stocks were pretty much on the money. EIA said motor fuel gasoline inventories rose 2.7 million barrels. Wholesale gasoline prices are 10% lower than they were this time last week and 34% lower on the year. According to EIA, year-over-year demand for gasoline is off 4.3%, but MasterCard Advisor reports a 6.4% decline in retail consumption.

Distillate fuel inventories, which include diesel and heating oil, rose by a whopping 2.2 million barrels last week. Why whopping? Oil insiders had forecast a modest 100,000-barrel uptick. Given the relative resilience in heating oil prices-if you can count a 4% weekly decline and 17% year-to-date slippage resilience-the higher-than-expected build is attributed to slackening demand for diesel fuel.

The resulting NYMEX crack spread implied an 8.6% refining margin as of yesterday's close, up from 7.5% last week. The margin stood at 7.9% this time last year.

Oil Refining Margins

The crack spread improvement bespeaks the relative depreciation of crude oil's versus distilled products. Crude oil's also losing ground to natural gas. Though natural gas prices have slipped nearly 6% since Labor Day, seasonal factors continue to favor gas over oil. Oil's energy-equivalent premium over natural gas has dipped $6.28 per million BTU since the beginning of September. On a 1-to-1 spread-long natural gas and short crude oil-that translates to a 228% return on margin.

Crude Oil Energy Premium

Comments

[Timothy Stolz:]

Why do I get the feeling, when it comes to the credibility of the EIA, the phrase "It's like the blind leading the blind" comes to mind?
The market seems to place a lot of "weight" upon those every Wednesday numbers, but I wonder how accurate or even truthful that report may be?
Does anybody really know?

2008 Oct 23 09:26 AM

[Managing Ed...:]

Keep in mind that the oil analysts reference in this report are NOT EIA employees, but representative of sellside (brokerage) firms and research organizations.

With that in mind, it's probably better to inquire into the credibility of these prognosticators.

2008 Oct 23 10:17 AM

[NOWHEREMAN:]

If WTI prices average 2-3 bucks above brent for the week expect an inventory increase, otherwise a decrease. This is my Rule of Thumb.

The author has excluded a major user of the Heating Oil complex, Jet Fuel. I would Hazard That the Airlines have a lot to do with that decline. MIA: usage, planes, and regional airlines plus all the additional efficiencies attempted.

Nat. Gas has gone down approximately the same amount from its peak as has crude, just because it is closer means squat. The old BTU generation equation of 6-8 times nat gas puts crude in the $40 to 52 range or some 30% lower than crude's current price. Right now, NG is about 10 times.

2008 Oct 23 11:19 AM

[Managing Ed...:]

Jet fuel is kerosene, not a fuel oil like heating oil or diesel, so its not counted in the distillate fuel category. Jet fuel is indeed down. By 9.2% year over year, in fact.

As for the crude oil/natural gas spead, you said "Nat. Gas has gone down approximately the same amount from its peak as has crude, just because it is closer means squat."

If you want to compare oil and gas on a dollar-for-dollar basis, that can't be true.

In September, the ratio was 15-to-1 in oil's favor. The ratio, as you point oit, now about 10-to-1. That means oil's premium has diminished. And that DOES mean something. Specifically, it means it was profitable to buy natural gas while selling crude over the past couple of months.

If your statement: "The old BTU generation equation of 6-8 times nat gas puts crude in the $40 to 52 range or some 30% lower than crude's current price." is a forecast, then remaining long gas/short oil would be warranted.

2008 Oct 23 06:45 PM