Too Much Oil (and Other Fuels)

by Brad Zigler

Did you ever have one of those nights? You know, when things start one way and end another? Oil traders are thinking that now.

NYMEX crude oil initially traded higher on short-covering in the overnight market, then slumped in the early morning hours ahead of the floor session opening and the release of the weekly petroleum inventory report. Selling was centered in the nearby March contract, indicating renewed concerns about inventory buildups.

Crude prices were buoyed Wednesday when Saudi Arabia stepped up as OPEC's swing producer, cutting back its production below previous commitment levels. The action seemed to have put a floor on the NYMEX March bid at the $35.50-$36.50 level.

The current inventory build, however, may precipitate a challenge to those bids. When the U.S. Energy Department released its report this morning, analysts' hopes for a moderation in supply were blown out of the water.

Crude oil stocks had been forecast to rise 400,000 barrels, but instead ballooned by 6.1 million. Despite an expectation that refinery operations would increase, runs slipped nearly 2%, according to Energy Department figures. Refineries utilized just 83.3% of their capacity rather than the 85.2% level forecast.

Gasoline inventories also shot up dramatically. Oil patch insiders guessed at a 1.8-million-barrel build, but were deluged by a 6.5-million-barrel addition.

An anticipated 1.3-million-barrel drawdown in distillate fuels also failed to materialize. Fuel stocks - including diesel and heating oil - actually rose by 800,000 barrels.

Trader reactions to the inventory news was immediate and bearish across the board. Spot-month unleaded gasoline futures lost two cents a gallon, or 6.9%, nearby crude futures slipped $1.25 a barrel, or 6.2% and heating oil slipped nearly two pennies a gallon, or 3.5%.

A steep sell-off in input costs is likely to reverse Wednesday's market action that cut deeply into refinery margins. Yesterday's nearly $5-a-barrel rise in crude was accompanied by only modest upticks in distillate and gasoline prices. For the week, crude jumped 6.3%, unleaded gasoline (RBOB) returns held steady and the heating oil (HO) crack deteriorated 5.6%.

Product Cracks Decline

Even with yesterday's upside reaction, oil's technicals remained weak. Overhead resistance sits at $45.25, basis the March NYMEX contract. Bears will be looking to take out support at the $38.50 level.

Comments

[notsosmart:]

more & more unemployment is the cause.all better cut production as storage is tight.hope the usa is filling the reserve.

Jan 23 10:58 AM

[Shaggieman:]

I second the motion, Mr. Obama please buy SPR oil now. He needs to hear this.

Jan 23 11:27 AM

[BMW62009:]

Just a quick question...and I really want a good answer in response.
Background...I don't have 10 doctorate degrees but am pretty good...at least I think so.

Let me just state some facts:
-Oil supply is higher...extremely higher than expected.
-Imports are very very high.
-SUPER CANTANGO exists
-Trillions of dollars will be spent worldwide to stimulate growth especially here in the US
-Everyone who can is leasing tankers to store oil.
-OPEC and all oil producing are losing trillions..not just on production but also their investments (Dubai!!!)

Now, just a Keynesian perspective (which for the most part has been working since the 40's after the "classical economists" killed us during the depression), oversupply leads to a cut in supply, that eventually leads to a rise in demand b/c of no more production, that leads to a rise in price.

Am I wrong? Are things really that bad that will kill oil and growth for the next 4-6 quarters like most analysts write about??

It just makes common sense that with all this "stimulus", contango, hording...that a price increase in oil isn't a far out thing. It's here. It's now.

No doubt oil was way to high...and if you got suckered in to buy (or write about it at $120-140)...it was common sense that it shouldn't have been there. Just like now...at least in my opinion...it should not be this low.

What do you think? Am I way off??

Jan 23 02:54 PM

[BigOlDave:]

BMW:

You're spot on!

You also tend to repeat yourself on these blogs! Do you have anything new to say ... because some new thoughts from you might be worth reading.

Jan 23 03:00 PM

[BrotherMaynard:]

BMW...you're not wrong. But what you are saying is synonymous with saying that the US and Global economy are going back to growth mode in the next 4-6 quarters. Its hard for me to imagine the US and global economy going anywhere without financing, given the awful state of banks around the world.

in addition, to your point about leasing tankers b/c of super contango... the near month price spikes are going to be capped given this massive build in inventory...if oil goes to 60, those ships will come to harbor or cushing will open the spigot and dump their supply...after all, why pay financing for another 8 months if they can recognize the gain 60 gain immediately. The point is, there is an oversupply problem. Oil isn't going back to 60 or 70 any time soon...not without a lot more pain to clear inventory out. That's why i believe equities, in general, will rebound before oil...equities are a function of future profits....oil is more a function of supply/demand (inventory)...not to say future expectations aren't included in oil, its just that (and i'm guessing) their effects are watered down during periods of oversupply.

Jan 23 06:06 PM

[mrluc:]

I agree that it now seems even more unlikely that oil will move dramatically in either direction in the next 3 quarters.

The current volatility looks like it's here to stay, though. Right?

I hope so. I like it.

Jan 23 08:33 PM

[User 341149:]

I agree as well that oil will not rebound to 60-70 very quickly because of the large amounts of supply. My concern is traders. We never made it to 147 based on demand. We made it there based on CNBC and traders getting rich. Like every stock trade, where there is a winner, there is a loser. Some made it big on the way up and some lost it big on the way down. Even with the supply, the psychology of the markets and the deliverance of information from the media can still play a big role in the rise in oil prices. Media could cause speculation from investors, causing a rise in prices which will allow for some of the supply to deplete which could help stabilize the markets. Regardless of the price increasing or decreasing, the oil markets are volatile and you can make some good money.

Jan 24 01:54 AM

[kernels:]

As a new investor I am finding this oil situation fascinating. Not sure how long inventory can keep rising along with price/b. My guess which is totally uneducated is the price of oil is going to collapse shortly but will rebound 10 fold once the economy starts moving. There are no signs the economy is growing, congress is fiddling while Rome burns and the banking industry is an utter mess. So for all those bulls in oil, good luck!

Jan 24 07:29 AM

[BMW62009:]

LOL. No nothing new. Just posted it on every oil article I could find so I could get some feedback.
Thanks.


On Jan 23 03:00 PM BigOlDave wrote:

> BMW:
>
> You're spot on!
>
> You also tend to repeat yourself on these blogs! Do you have anything
> new to say ... because some new thoughts from you might be worth
> reading.

Jan 24 12:47 PM

[Moon Kil Woong:]

Inventory is a big issue. Storage sites are brimming with the stuff. If demand keeps slacking off there will be no where to store it fast enough.

Pretty soon everyone will be looking for more salt mines to store it which is ironic. The world spends tons of money to suck it out of the ground and then they dump it back into the ground like the US's strategic reserve. An alien would be laughing its head off at human behavior.

Poor suckers who bought oil at $100 a barrel and stored it then. Oh wait, we all did that. It was the US government. When economists asked if the US should stop buying oil for the strategic reserve in 2007 and 2008 to help prevent the oil squeeze running oil beyond $100 bucks a barrel Bush Jr. said no. I guess he was a Saudi loyalist to the end.

Look where that got the Middler East. There is price elasticity in everything even if you have a oligopoly. It's called substitution, economic cycles, and supply and demand curves. OPEC should think twice about raising oil prices to astronomical prices next time before they choose to squeeze the US, their biggest consumer. In early 2009 they were saying the US dollar was no good. Should we be saying today that their oil is no good. They are ripping us off selling us deflated oil. Oh how the times have changed.

Jan 24 06:22 PM

[777:]

Gold rising up on banking bankrupcy is a good reasoned news. But oil rally on the end of Iraq war and the big deprression is not a reasonable story.
Gold rising up shows that the world don't like sharp volatility any more. Let the price of oil come down for some time. The market is exhausted.
Every sector including financials, real eastaters, automakers is in crisis, and so is the price of oil. What's up ?
In my opinion, a chinese guy with bad English, The bubble of real eastate
destroyed the world financial industry and itself; likewies, the bubble of oil price sentence the automakers to death and it also cannot have a narrow escape.

A dying old bull can not be saved to live a long life. When Ford began to
put its electrical auto into the market in the next year, a new era of new energy is coming like E-time.
With computer and internet, the traditonal media like radio, TV and newspaper is no longer the king and most movie cinema closed doors. What about the oil industy and oil station?

Jan 25 08:50 AM

[SocialistsG...:]

Job #'s will continue to drive down demand oil. Look for the price to be in the 20's - teens by Mid-Spring. Once storage capacity is max'd the balloon will pop and we will see a return to late 90's $.

Feb 17 09:04 AM