Will the Oil Price Rise Help?

By Brad Zigler

Oil prices are surging again following a U.S. Energy Department report showing that the nation's supplies of crude oil, gasoline and heating oil are much lower than expected.

May crude opened the NYMEX floor session a dollar higher than the previous $101.22 settlement, then shot up to the $105 level. Heating oil and gasoline futures, too, opened strong after being lifted in the overnight markets.

The government reported gasoline and heating oil stockpiles fell last week while crude oil inventories remained unchanged. This came as quite a surprise to analysts who'd jawboned a 1.5 million increase in crude supplies. Oil stocks now stand at 311.8 million barrels, about average for this time of year, according to the Energy Department.

More telling, perhaps, is the tale told by refining products. Total motor gasoline inventories decreased by 3.3 million barrels last week, well below the 1 million barrel drawdown expected by oil insiders. Still, gasoline stocks are above the upper limit of the commodity's average seasonal range. Hold that thought for a moment or two.

Another surprise came from the distillate fuel category. Inventories had been expected to decrease by 1.5 million barrels, but instead worked 2.2 million barrels lower. Stocks are in the lower half of the average range for this time of year. Another thought to hold.

As we've looked at refining margins over the past few weeks, readers have wondered what's been behind the declining profitability in the crack spread. "Cracking" is industry jargon for distilling. A refiner "cracks" crude oil into various products ranging from highly refined gasoline to thick residual fuel oil. The most marketable products are gasoline and heating oil.

Last week, we reported the fifth-consecutive weekly decline in the crack spread profits (see "Processing Profits Plunging").

Here's where you get to unload your thoughts.

Despite higher at-pump prices, gasoline inventories have been rising. Wholesale prices, as a consequence, have been falling. Year-to-date, May reformulated blendstock has slipped 5.5%. Meanwhile, stocks of heating oil (a denizen of the "distillate fuel" category) are now lower than average. Not surprisingly, the price of heating oil has risen 11.5%.

Keep in mind that a moderately efficient refiner can draw two barrels of gasoline and one barrel of heating oil out of a three-barrel lot of crude. The rising cost of crude oil inputs, coupled with the lower returns on the sale of gasoline swamps the gains earned from marketing heating oil.

This table spells out the margin erosion week-by-week:

April/May Crack Spread

 

We'll roll to the May/June crack spread in tomorrow's report to see if today's price action has had a salutary effect.

Comments

[iThinkBig]

Why a whole article on this, just have a tagline that says 'refiners cut production to improve profits'. It's what happens when greed from the top does not allow competing products to enter the market. Now all Americans will pay the price, starting with the Middle Class whom are going broke. But it will also catch up to the ones at the top next in line. They will just be driving their multiple Bentely's a little longer then Joe six pack has stopped driving his F150.

[AmesTiedeman]

Oil is headed to the 80's over the next 2 months, then on to 120 or above this summer...