What's Happening With Crude Oil?

First, the oil reaction. Apparently everyone is convinced that George is preparing to blitz Iran. That’s the only thing I can come up with to explain the dip and subsequent rally to $55.37 after we got another build in distillates. Somehow the following inventory data was seen as bullish. Traders may see the lower than expected crude build as a sign Opec is finally easing off the production pedal, but that’s pretty thin. More likely this is just a follow on of the re-tracement from the greatly oversold position we were in a few days ago. Here’s the high points of the inventory data:

Oil: up 0.75 million barrels. So imports fell 1.2 mm bopd from the prior week. I’d point out that a look at the 4 week average crude imports figures shows Opec is not yet serious about the cuts. 1/05/07: 9.416 mm bodpd, 1/12: 9.954, 1/19: 10.124. Thats a 7.5% INCREASE in oil imports in 3 weeks.

Gasoline: up 4 million barrels. It was icy, nobody likes to drive on ice. Actually demand is off only ever so slightly but the refiners are really starting to trim production.

Distillates: up 0.7 million barrels. Analysts were looking for a draw of between 250,000 and 1 million barrels. The average change in storage for the third week of the year back to 1999 is a withdrawal of 2.5 million barrels. We got a build and the weather was colder than normal. Hmmm.

Crude inventories remain comfortably above average. That dip occurred when refineries cranked up activities late in the fourth quarter. I grudgingly give some credit for it to Opec although compliance with the first two rounds of cuts is still less than 65%. The slight uptick is a combination of a one week surge in imports and the refiners calling in sick.

Product inventories continue to reverse course and rise. Not unseasonably strange for gasoline but heating oil is just unloved here.

Gasoline inventories have jumped 20 million barrels in the last five weeks even as refinery utilization levels plummeted from 91 to 87.4%. Moreover, the days of supply chart confirms that the inventory rise is attributable to slack demand and not just a flood of imports. In fact, gasoline imports fell 12% week over week and were below year ago levels.

Note To Tesoro Corporation (TSO): you’re starting to look overheated. TSO has been the refinery analyst’s dream for one reason: PADD V (West Coast) cracks have been running roughly 3x those of the Gulf Coast. Everything else those guys cover has seen margins fall between 30 and 40% on a sequential basis but the West Coast margins were actually up 20% 3Q to 4Q and a whopping 50% YoY as high demand kept tougher to produce (I know, not as tough in the winter as in the summer) California gasoline inventories in check. However, since the third week in December, PADD V stocks have begun to build (their refineries aren’t the ones with the blue flu) and the Los Angeles benchmark price has started to catch up to the declines in other parts of the country seen earlier in the month.

Distillate Inventories: Even I thought we’d get a small draw on stockpiles but the high secondary and tertiary inventory thesis yielded another build in inventories despite the coldest weather of the winter to date. Looking at the pattern below you can see how seasonally odd the weekly trend is. Note that this is all distillates (including diesel and not just heating oil) so at least it’s not bad news for the trucking stocks.

Natural gas inventory day: good sized withdrawal simply won’t matter.

My Estimate: 165 Bcf withdrawal based on 230 heating degree days… On the surface the higher degree day reading would seem to imply a higher number than mine as seen here...

…And while its possible that we get a big kahuna pull the degree days were in the wrong areas to score a bigger draw. I could always be wrong on this and the reaction to even a small number may be as perplexing as yesterday’s action on oil but with gas up 20% in five days, its not that big a leap to make that gas needs a huge withdrawal to stay above $7 for any length of time.

Consensus Range: 150 to 190 Bcf qithdrawal. That’s probably Fimat on the low end those baggers!

The number to beat is probably 168 Bcf. That was the largest withdrawal of this season which was recorded in early December. Anything less and we should get a sell off and I think, as I said above, we’re coming in light of that number. I could always be wrong on this and the reaction to even a small number may be as perplexing as today’s action on oil but with gas up 20% in five days, its a not that big a risk to take.

January Is Shaping Up To Be About Average

Estimates are in red.

I’m even sporting a number for next week’s withdrawal! Next week should see more demand despite an early aggregate degree day reading that is a bit warmer than the one last week. The HDDs simply appear to be moving into more gas centric regions:

click to enlarge

Even if this week and next week yield 170ish Bcf sized withdrawals you’re left with record storage for this time of the year of 2,596 Bcf. The previous record was set just last year at 2,494 Bcf. Moreover, 2.6 Tcf is well above the five year average of 2,180 Bcf.

After this week you’ve got about 10 weeks of winter left. The low to high range of withdrawals for this 10 week period (1994 to 2006) is 714 to 1,280 Bcf. If I assume that I’m right about the 165 Bcf today that yields trough storage (end of March) of 1,491 Bcf based on the max withdrawal case up to 2,057 Bcf on the weak withdrawal scenario. A verage trough over the last 12 years is 1,025 Bcf. While the hope of another withdrawal close to 200 Bcf may support prices through next week I continue to see gas testing $6 in early February and $5 later in the month.

Holdings Watch: If we get a gas withdrawal below 160 I’ll be taking more $65 puts on EOG Resources (EOG) and re-entering put positions in Southwestern Energy (SWN), Quicksilver Resources (KWK), and/or Arch Coal (ACI)/Peabody Energy (BTU). This could be a very fast play as traders may shrug it off in hopes of a bigger number next week. However, with 20% profits in a week I’d bet they’re getting anxious.

Comments

[Greg Pinelli:]

The problem with looking at minutiae is that commentators are clueless about fundamentals and longer term trends....so Zman can't figure much out about the bounce in prices??
...There are only two real factors that influence the market today and for the next few years..Geopolitical uncertainty (and it certainly doesn't include the naive George Bush invades Iran nonsense) and the Godzilla of all denials...depletion.
Mexico is beginning to admit that it will soon (within 5 years) deliver 500,00 less barrels per day to the US. This will be a common theme in the industry for years to come. Reserves that never existed..reserves that are depleting 30-50% faster than projected...a dismal outlook for discovery...and...the eventual recognition that ethanol development is severely limited..and oil sands are more destructive than anyone admitted. Welcome to the future..and if you're willing to make a short term bet based on the kind of reasoning I'm reading from Zman..please have some portfolio insurance..because you are in for a reaming. Can demand destruction outrace depletion?? You won't get that level of the debate from lightweights....

2007 Jan 26 09:50 PM

[Zman:]

Pinellini has attacked just about every writer on this site so I'm honored. My rebuttal:

1st paragraph: clueless about fundamentals. Please come check out all the fundamental stats and analysis on my site at:

zmann.wordpress.com/

2nd para: depletion is a fact of the business but if you're a peak oil guy you're going to have to be patient. Russina will add 2 to2.5x the amount you're citing will be lost from Mexico this year. Brazil is on the rise. Angola, and more. Some benign neglect regions like Mex and Vz will fall for a time but this is management and will be corrected over time. The Saudis just announced they'll be over 12 mm bopd by 2010. The list goes on.

Para 3: demand destruction...I assume you're talking about crude? There is none. None. Early adopters are exhausted with the Prius and Toyota has got 0% on them. SUV sales recovered after gasoline plunged from $3 to $2.20. Anyway, I've been on the buyside and sell side in energy research but if you can stand to learn a thing or two from a lightweight then do stop by the site. Or don't because pointing fingers at everyone around SeekingAlpha only proves you're too smart to learn anything anyway so why bother.

2007 Feb 10 06:22 PM