Is Crude Oil Headed Lower?

Crude oil inventory reports came out Wednesday from the Energy Information Administration (EIA). Is the trend towards higher prices supported by the numbers?

Crude oil inventories were down four million barrels but still 7.7% above last year’s level. This was a larger drop in inventory than the market was expecting. Imports dropped 764 thousand barrels, 486 thousand barrels below the four-week average. Imports for the week were 1.846 million barrels less than one year ago.

Against the backdrop of falling crude oil inventories, gasoline stocks were down 400 thousand barrels and distillate inventories were down 300 thousand barrels. Gasoline inventories are tracking 6% above one-year ago levels. The 800-pound gorilla (40 million barrels) on the airplane is distillate stocks. At 31% above last year’s inventory, it is still a weight on the market, not only for crude oil but also for refiners.

Refinery inputs are 647 thousand barrels below last year’s levels, or -4.6% Refinery inputs have been ratcheting down in recent weeks. This can be attributed to changing over to winter fuels and trying to match production with demand.

The numbers tell us that crude imports could grow quickly with any spike in demand. Distillate inventories tell us the economy is not moving goods over the highway (truckers run on diesel), or rail. This conclusion is supported by third quarter results from YRCW, and BNI where freight volume dropped 27%.

It is important to remember that current pricing on crude oil is influenced by world demand, not just U.S. demand. The Asian economies are improving, China’s economy expanded by 8.9% in the third quarter.

The chart below shows our inventory levels compared to one year ago, we are entering the top of the range, which is bullish.

This next chart is the supply of crude oil stated in the days of usage, which is bearish.

The present inventory levels in the U.S. do not support $80 per barrel oil, but this price is set in an open market. Every day bidders and sellers factor world inventories, economic recovery, currency exchange rates, terrorism and personal biases into their actions.

Crude oil is primarily a transportation fuel. It is not used for electricity generation. Crude oil usage increases to move goods and people as economies recover. Crude oil price is likely to increase in price with the improving world economy, faster than justified by the U.S. economy. We remain mired in a government-prolonged recession.

You can lock in your price of fuel with a strategic investment in U.S. Oil Fund (USO), or U.S. Gasoline (UGA).

The penalty good men pay for indifference to public affairs is to be ruled by evil men.— Plato

Disclosure: No Positions

Comments

[epeon:]

Two things support the price of crude. First, there is a 5% depeletion going on continously. This means that crude production is going down unless we build new oil production infrastructure. It has been estimated to maintain current capacity that the world needs to spend $1 Trillion/year. We are not doing that. Secondly, the US dollar is going down in dollar. So, a lot of the price increase is merely inflation.

Nov 06 08:20 AM

[Mad Hedge F...:]

kjw If you think oil is expensive here at $80, look again. The Department Energy chart below of US oil consumption per unit of output shows that, in fact, we are at a 40 year low in the price of crude. In other words, it takes half as much oil to produce a unit of GDP than it did in the late sixties, when 12 miles per gallon was considered reasonable, and only Lincoln Continentals got abused because they consumed a gluttonous six miles per gallon. This is the why current lofty prices are having a negligeable effect on a reviving economy. The other chart shows the price of oil in inflation adjusted terms. Again, we are at the high end of the range, but nowhere near the top. What’s the lesson in all of this? If the price of oil is not hurting now, then it will move a lot higher to where it does hurt big time. When the US gets back on track, and the emerging markets return to firing on all 12 cylinders, triple digit oil is a gimme, and new highs will easily be attainable. Then you can expect the current perfect correlation between rising stock and crude prices to shatter. Make sure you maintain exposure to the oil patch, either through majors like Chevron (CVX) (click here ), oil service companies like XTO Energy (XTO) (click here ), the Russian market ETF (RSX) (click here), or just the plain vanilla Oil Trust ETF (USO). If noting else, these names will help immunize your portfolio against the certainty of higher fuel prices. If you are wondering where the “W” recession might come from, this is it.

Nov 06 09:41 AM

[Ferdinand E...:]

Very impressive article and comments. The kind of observations that should be read by the people in corner offices at the Energy Department.

Nov 06 10:02 AM

[Jack Larsen:]

My crystal ball says every drilling rig will be working full speed ahead by July 2011. Recession or not, lets remeber Peak Oil isn't just a concept, it's the Prime Mover; the proof being Global Warming won't be a problem when oil hits $300 per barrel. Cap and Trade? We won't even talk about it any more.

Nov 06 03:05 PM

[TraderRob:]

The argument over the USD price of crude futures over the next year has little to do with Peak Oil theory, and more to do with macro trade relationships and individual nations' recoveries or lack thereof.

The "Post War" era in the Western world has seen developed countries hold a great deal of control over the otherwise underdeveloped nations as their economies held the key to prosperity for so many poor economies who were willing to export inexpensive goods richer foreign consumers.

Comments from new found stable nations' leaders accross the globe in the form of BRIC (Brazil, Russia, India, China) and BRIC-like countries suggest that the Old Guard is changing from a U.S. dictated market place to a truly free market. President Luis de Silva of Brazil is a perfect example of a developing nation leader who is peacefully vocal about his desires to lead South America to prosperity through allegiances and trade partnerships excluding those with America. Specifically, Brazil has found a premier trading partner with China, stabilized its domestic banking industry and pursued reserves in currencies other than the dollar.

These sorts of actions will persist into the post-recession environment and we will find the U.S. Dollar in lesser demand. Government debt in the United States is no longer a 0% risk vehicle; instead it is quite riskier given the physical state of the public balance sheet.

Commodities may go higher with equities as the USD falls, but it's the demand in developing nations which will drive oil consumption into the future.

Nov 10 12:31 AM

[mws:]

Goldman Sachs (GS), quoted this morning in both the Wall Street Journal and Morningstar, is forecasting that "oil supplies would tighten in the coming months as the global economy rebounds from a severe slowdown... The bank predicted the glut of global oil inventories would dwindle into a deficit over the coming months due to strong Chinese demand for industrial fuels and an anticipated recovery oil consumption from developed economies."

See: online.wsj.com/article...

Nov 10 09:55 AM