What Are Diesel Inventories Telling Us?

API put out their Oil, Gas and Distillates information yesterday evening and I wanted to take a look at the numbers as well as the latest diesel inventory data. The reason we look at diesel is to see what is occurring in the commercial transportation area. In other words; are we seeing any traffic and movement that would signal that deliveries of orders are beginning to increase.

Below is the chart that shows the past two years and the percent change (increase) in inventories. Once again we are seeing that oil is moving up in price even as inventories are growing to record levels. Obviously that does not make much sense.

So far this year, diesel inventories are up almost 20%. The latest reading from the API shows that Crude inventories had over a 3 million barrel build and Gasoline inventories grew by 1.3 million barrels this week.

The more important report will be coming tomorrow morning from the Dept. Of Energy (-DOE-) and expectations are for a 2.1 million barrel reduction in crude inventories. We expect to see a slight draw down, but not to this degree and believe that oil prices will maintain in this general range. Usually the API and the DOE are somewhat similar, but the degree of difference from the API report and the DOW estimates are striking.

If we do see a spike in price above (or close to $70) we will be looking to short crude as we believe that that price is not sustainable after the summer. (I will short USO or buy SCO depending on the outlook.)

Disclosure: Horowitz & Company clients may hold positions of securities mentioned as of the date published.

Comments

[MarkitWacha:]

The oil price reflects depletion rates. Production outlook is declining from here on out. The producers know this, so they've put the market in contango.

We'll see some interesting changes in lifestyles soon.

Jul 22 10:52 AM

[Tod vom Himmel:]

It's (nearly) all about the weak dollar.

Jul 22 12:22 PM

[User 283977:]

Diesel inventories are tracking Commercial transportation (demand) while the price of oil is not tracking demand. I agree that long term, the price of oil must be influenced by the depletion rate. However, in the immediate future it seems more likely that the price of oil is being driven by a mixture of speculative forces and artificial constraints on supply. In other words the price of oil today is probably more a function of short term information, not long term trends.

When demand is trending down but the price of oil is trending up, it suggests that the price of oil in the immediate future is mostly under the control of supply manipulation, speculation, and manipulation. It might be possible to model that portion of the price of oil that is actually driven by actual utilization. At that point you might be able to back out the size of the speculative pricing component. It would be interesting to see how the speculative force varies over time and how it correlates with other news events.

Jul 22 12:57 PM

[John Galt:]

I don't know if I'd neccesarily use the "M" word.

Oil is a function of S&D yes, but also speculation. The economics of the S&D right now don't work for a price increase, but speculators for whatever reason are bidding the price up ( depletion rates, political factors, weather, petro dollars etc.)

Jul 22 01:28 PM

[Samsung:]

interesting article

Jul 22 01:30 PM

[rickstravel:]

what is the cost of diesel right now today? per ton if you have it

Jul 22 02:07 PM

[ari5000:]

check the movement of $USD since Mar. 9 when this rally began.

Dollar / markets are 100% inversely correlated.

$USO has dipped a few times suggesting it is not entirely correlated with the dollar -- maybe 80%.

The Fed may have discovered the magic formula. When the dollar approaches zero, equities are worth near infinity. Magic formula during a recession when the obvious consequence -- inflation -- fails to appear. The minute the markets recover, this scheme is going to run into the biggest brick wall ever seen.

Naz approaching 11 up days in a row -- is that not a record?

Jul 22 02:30 PM

[a. palmer jr.:]

At least we won't have to hear about an oil shortage for a little while, anyway. That got kinda boring.

Jul 22 02:31 PM

[cyberclark:]

Speculation has driven the oil industry for its entirety. I think Obama is releasing healthy surplus figures into the mix to control speculation.

Good or bad? I don't know.

Jul 22 03:07 PM

[conceptwizard:]

All you have to do is see the correlatioin between the transportation industry and diesel. Rail has taken 4000 locomotives off the tracks and 500,000 cars, Fedex & UPS are way down. And the transport industry are off by 30%.Consumption will follow.

Jul 22 03:53 PM

[robert.b.fe...:]

There is no oil shortage Google Williston Basin or the Bakken formation. Or go to www.usgs.gov/article.a....


On Jul 22 02:31 PM a. palmer jr. wrote:

> At least we won't have to hear about an oil shortage for a little
> while, anyway. That got kinda boring.

Jul 22 04:37 PM

[The Greates...:]

News Flash, people are not driving, they are not buying, especially gas today. We are in a DEEP recession and will be for a long time. The world has not recovered from the last round of speculated crude oil pricing games to use enough to push the price up, much less hold it around $60.00. Oil $35-40 a barrel by Dec. Oil prices have been on life support since Feb and it is going Code-Blue soon.

Jul 22 07:04 PM

[The Greates...:]

Oil between $35-$40 by December, the oil industry pricing has been on life support through out this Feb-July rally. The pure facts are clear, people are not buy anything that they do not need. The recovery is a long way off, like all the jobs that have been lost since July 08. Like the old saying goes, “It is time to pay the piper.” The bailouts that went to the too big to fail did nothing for the US economy, throwing good money after bad money never works. The worlds economy is too global for any amount of bailout to work, it is simply too large of a problem. The over all global economy is going to have to go through a trimming down effect, “cutting the fat” so to speak. And that is why America is losing 450,000 jobs a month today, adding to the 10,000,000 lost over the last year. Everything (everyone’s economy and business’s too) that proceeded the July $147 a barrel peak price was based on using way too much credit to get by on. When the bubble burst, so did the global economy. A lot of money was made up to that point, but where did that money go today? All the run up in the cost of crude did was leave the world with higher prices for every single thing manufactured, shipped, barter or sold today.

Jul 22 07:08 PM

[G. L. Turner:]

NO PROBELM MAN, Supply and Demand are things of the past...

Government Sachs and JPM have learned how to create their own oil/RBOB pricing rallies, gathering sheeple into their game, completely devoid to any relationship to the fundamentals.

How do you think they made so much profit in 2Q....the price of oil and RBOB did not rise in a void, my freinds, nor did it rise because demand had picked up...except in 'your mind', if you bought into theri scam....

Jul 22 10:10 PM

[whisperonth...:]

Your link seems to be bad, Mr. Ferguson.


On Jul 22 04:37 PM robert.b.ferguson wrote:

> There is no oil shortage Google Williston Basin or the Bakken formation.
> Or go to www.usgs.gov/article.a....

Jul 23 09:33 AM

[robert.b.fe...:]

My appologies. Try this one pubs.usgs.gov/fs/2008/...


On Jul 23 09:33 AM whisperonthewind wrote:

> Your link seems to be bad, Mr. Ferguson.

Jul 23 04:53 PM

[Old Trader:]

Leaving aside geopoltical risk and meteorlogical risk, which are both "known unknowns", production is declining pretty much across all producing areas. Mexico's Cantrell Field in the Gulf is in sharp decline (off by 9% if I recall correctly), the same is true for the North Sea fields, Saudi Arabia is "resting" the giant Ghanwar field, while OPEC seems to be maintaining fairly good quota "discipline", for a change.

Russia's fields are suffering from underinvestment and years of mismanagement, and the recent treatment of international majors like BP and Shell by the Russian government will give pause to any others looking to make moves in that sphere. The recent giant discovery of the Tupi field off the coast of Brazil is years away from commercial production.

In short, any respite in oil prices is likely to be short-lived, imo.

Jul 23 07:21 PM