Oil Refining Cranks Up

By Brad Zigler

Oil supplies from OPEC are burgeoning. The latest figures show OPEC's supply rising for the fourth straight month in August as overall compliance with production cuts set by the cartel continue to falter. Quota cheating by Saudi Arabia, Venezuela and Nigeria, in particular, is keeping a lid on crude prices.

Nearby NYMEX Crude Oil

This week, crude oil traded down $4 a barrel, or 5.6%, matched by drops in gasoline and distillate fuel prices.

Sell-side analysts expected a drawdown of 600,000 to 900,000 barrels in U.S. crude stocks to be reported by the Energy Department while the industry-supported American Petroleum Institute (API), predicted a 3.2-million-barrel off-take.

Actual oil inventories fell by only 400,000 barrels.

Gasoline supplies declined by 3 million barrels, close to the API's estimated 2.8-million-barrel drain. The drawdown was nearly three times larger than that forecast by analysts.

Distillate fuel inventories, including heating oil and diesel, increased by 1.2 million, a bigger build than the 900,000-barrel add predicted by the API. Analysts had been a bit more cautious with their notions of a 775,000-barrel addition.

Refinery runs ballooned to 87.2% of operable capacity last week as gasoline production stepped up to average 9.2 million barrels per day. Daily distillate fuel production also increased to an average 4.1 million barrels. Only 84% of capacity was utilized the previous week.

Oversupply was reflected in product cracks this week as both gasoline and heating oil proceeds fell. Heating oil's spread took a 10.4% dip, while the RBOB gasoline crack slipped 0.7% this week. Still, heating oil is the seasonally favored fuel: The 2-1-1 crack spread is trading at a premium to the gasoline-rich 3-2-1 crack.

Futures-Implied Product Cracks

This week, crude oil's quarterly contango was pared back to $2.09 per barrel from last week's $2.28 level. With a contango that low, production, rather than storage, is incentivized.

Prices for West Texas Intermediate [WTI] crude are once again sustaining a premium over North Sea Brent oil. The barrel price for WTI, on average, traded 75 cents higher than Brent's this week.

Indicators for October NYMEX crude have turned bearish in the near term as prices are now testing the contract's 50-day moving average. For bulls, the upside objective is the June reaction high at $75.27. Support is at the July low of $65.

*Note: To provide a longer-term perspective, we've pushed back the base for our real-time monetary inflation indicator to May 2006. The base previously was January 2008. The indicator represents the average annual rate of monetary inflation over the period. The current 12-month inflation rate is 0.2%.

Comments

[Mark Bern:]

I would expect OPEC to keep prices from climbing too high in order to discourage additional exploration (more competition), increased production development in areas like the tar sands, or increased development of green energy. At $70 or below, the cost of developing many alternatives to existing oil sources is less economical. If oil were to rise above $80 and sustain those levels, OPEC loses more of its relevance.

Sep 03 04:14 AM

[Ferdinand E...:]

Very good article, but I don't believe that Saudi Arabia is cheating on the OPEC quota. Why should they? Besides, the The people running that country are intelligent enough to know how to play this game.

Sep 03 09:29 AM

[Mad Hedge F...:]

xcvb. Crude has been trading like a 3X short dollar ETF. If you look at pure supply/demand considerations, oil should be trading in the $40-$50 range, not the $65-$75 range that we have seen. That means that a $25 speculative premium can be laid purely at the door of the big hedge funds. The big oil producing countries, seeing Obama’s policies leading to a weak dollar for as far as the eye can see, are also ditching their bucks as fast as they get their hands on them. That is why the Gulf sheikdoms were one of the biggest buyers of crude near last year’s $148 peak. This leaves industry insiders clueless about the price direction of their products, not an easy way to run a business. They understand rig counts, tanker deliveries, and depletion rates, not commitment of traders reports, Bollinger bands, and Fibonaccis. No doubt it was their carping that brought regulators to pressure Deutsche Bank to shut down its double long oil ETN (DXO). Of course, this all means the consumer is getting shafted, paying $3.39/gallon at the pump, instead of $2. This premium is causing a drag on the economic recovery as well. Europeans and Japanese who are paying up to $10/gallon are wondering what we are bitching about. Bring on a “W” recession and poof!, that premium disappears, as it did last year.

Sep 03 10:52 AM

[LilBob:]

On Sep 03 10:52 AM Mad Hedge Fund Trader wrote:

...Of course, this all means the consumer is getting shafted, paying $3.39/gallon at the pump, instead of $2. This premium is causing a drag on the economic recovery as well.

You hit the nail right on the head Mad Hedge-what you're describing dovetails perfectly with the arguments I've been posting about the "burnt finger effect": after a commodity which was thought to have inelastic demand characteristics exceeds the threshold of elasticity for a given period of time, consumers may harbor a resentment against producers of said product and engage in behaviors that allow them to reduce their consumption of that commodity. The recession that we're in is an aggravating factor to a behavioral phenomena.

Sep 03 08:49 PM

[LKofEnglish:]

product sitting on the shelf is worth, well ZERO!!!!! either the refiners start refining or they go broke. if they lose money "on the trade" so what.

Sep 04 11:35 AM