Cross Roads For Crude: Crude sported a minor rally yesterday, but in the end couldn't hold $62. Today everything hinges on the inventory report. A build in gasoline stocks would push crude towards a test of $60. Another draw of last week's 5 million barrel variety and we test $65.
Inventory Expectations from the Dow Jones Survey:
Crude: Up 1.6 million barrels. Could be bigger. Could also be negative if imports continue to rise and the refiners come out of hibernation. The crude number continues to ride shotgun to the key driver of prices at present: gasoline.
Gasoline: Down 1.3 million barrels. As I pointed out on Monday, it's normal for gasoline stocks to experience drawdowns for the next 2 to 3 weeks. However, for prices to not spiral out of control (too late) we need two things to happen: 1) Gasoline imports topping 1.1 mm bgpd and, 2) Utilization moving up and eventually past 90%. I have a hunch gasoline imports come in closer to 1 mm bpdg this week while utilization will tick up to 87.5%.
Pay the Piper Watch: The downside to not running your facilities is that you have to report earnings on a quarterly basis. While it may jack gasoline and stock prices through the roof, it puts a dent in throughput and may even shave earnings per share.
Case in point: Chevron Corp. (NYSE:CVX) announcing after the close last night that the shuttering of its Richmond, CA refinery will reduce U.S. crude input volumes by 20%. No doubt margins will be stellar. Recall that gasoline prices started to rally when this refiner when off line in mid January.
Otherwise, Chevron's comments remind me of other recent industry
warnings updates (see ConocoPhillips (NYSE:COP) on April 4th): oil and gas price realizations down YoY and oil price down sequentially, upstream volumes down, chemicals margins off slightly. Of course, COP is up over 2% since then, so maybe nobody will care about this notice either.
Distillate: Down 900,000 barrels. Natural gas is rising this morning as traders anticipate a big number here. Very hard to judge this time of year as heating oil is not as elastic to weather as natural gas is.
EIA Dropped A Number of Bomb Shells Yesterday:
EIA Cuts Global Oil Demand Forecast -- for the second time in two months the EIA cut their demand forecasts for globals and U.S. crude oil consumption. In February I said that the EIA and IEA upward revisions to 2007 oil demand wouldn't stick, and well...there you go (again).
Comment: IEA downward revisions should come any day now.
EIA also commented that global crude inventories likely declined 600,000 bopd in 1Q07. With 90 days in the quarter, this yields a global crude drawdown of 54 million barrels. We know it didn’t come from the U.S., where inventories actually climbed 13 million barrels during the quarter.
EIA says OPEC production is on the rise. That’s funny -- I thought they were under production quotas and wouldn’t raise exports until September. This means that at present levels of production, the 10 OPEC nations subject to quota compliance is running about 50% relative to the 1.7 mm bopd cuts announced between November 2006 and February 2007. Meanwhile, total OPEC nation production is up even more with Angola pumping away -- happy to join the club but not paying the dues yet.
EIA says natural gas prices will rise relative to year ago levels. More on this in tomorrow’s gas post, but suffice it to say for now that the EIA bowed to hurricane mania with its price forecast while sighting higher production, higher LNG imports and lower demand for generation this summer.
Crack spreads linger at record levels. If the EIA is right about global crude demand, the following spreads should represent pretty much peak levels for this year. Of course, I said should.
Once again I’ve exceeded everyone’s patience with a giant post. I’ll have to get to crude supply and demand by region tomorrow.
Holdings Watch: Waiting on more data. Still pretty comfortable with refining puts (well some of the closer to the money ones), since I’m in May contracts.
Analyst Watch: FBR moves Giant Industries Inc. (NYSE:GI) up to hold and bumps Portugal Telecom SGPS SA (NYSE:PT) by $2 to $79. GI is being acquired by Western Refining Inc. (NYSE:WNR), so this would seem a fairly odd move until you see that the FTC is indeed trying to block the merger on anti-competitiveness grounds. I still have half my puts on WNR which should get roasted a bit more today. Meanwhile, BS cuts WNR to underperform. Ethanol maker Verasun Energy Corp. (VSE) cut to reduce at UBS. Stifel initiates on drillers Santa Fe International Corp. (NYSE:GSF), Transocean Inc. (NYSE:RIG) and Noble Corp. (NYSE:NE) with hold ratings.
Erroneous Comment Watch: "While we expect [refinery] utilization rates to improve as we transition out of maintenance season, refined product inventories are at very low levels," Prudential analyst Jason Gammel said in a research note. "We expect that margins will remain strong into summer, but they may be near a peak in the shorter term," he added.
Comment: First, I agree with that last part. Second, the word ‘very’ means a lot of things to a lot of people. I find it to be a bad (inaccurate) but often convenient word. We usually learn in it kindergarten. At present it does not describe inventory levels in either gasoline or distillates.