Crude Inventory Down; Gasoline Inventory Up: Whither Pump Prices?

Last week's EIA report reports crude oil inventories down 4.6 million b/d from the previous week's levels, and gasoline inventories up 1.0 million b/d in the same period.

A couple of questions should leap immediately to mind. First, why are crude inventories falling? Second, do the gasoline inventories indicate that Americans are consuming less? 

Let's start with crude inventories. Most of the EIA inventory figure reflects stocks held by refiners. Refiners, whether independents or a division of an integrated oil company, use a last-in, first-out inventory accounting scheme. As last quarter's refiner earnings demonstrated, refiners can not charge enough for gasoline to recover their costs and make a profit when crude oil costs are so high. 

It makes sense, then, for refiners to draw down inventories, reaching into their lower-priced barrels. Economically, there is no advantage to refill inventory at today's prices, because traditionally as refined product inventories grow, pump prices fall. In other words, oil market fundamentals indicate that crude prices should fall. Refiners are content, for now, to wait for that fall. 

Turning now to gasoline inventories, the economics of the situation just now don't favor increased production. Producing more gasoline, and losing money on more production, makes no sense at all. Thus, as refiners produce gasoline from the lower cost barrels in their crude inventory, why don't they produce more and lower prices to their jobbers? 

According to the EIA report, refining capacity is running at about 88.6%, so there is spare capacity to refine more. Doing this would only squeeze refiner profits even more because it is likely to increase consumer demand. Refiners would then be under severe pressure to buy the high priced barrels, once again leading to lower profits. 

One might propose a few conclusions from all this: 

1. Supply might be tight, but it's adequate. This is what the Saudis have been saying for at least 2 years. 
2. Physical oil is available, but speculative oil is in short supply. Shorting in the futures markets won't change this, mostly because the index traders all want to be long. 
3. US consumers are conserving and are, as is so often the case, way ahead of policy makers on how to cope with high pump prices in the short-term. 
4. The oil-producers are concerned about demand destruction. The Saudis have not proposed a meeting of consumers and producers because they are comfortable with current crude prices. They are concerned that even if they leave oil in the ground its value will drop. The Saudi royals are cooked if they don't manage their oil supply. The US and other consuming countries have some leverage here.

Comments

[John Pseudonym:]

"The Saudi royals are cooked if they don't manage their oil supply. The US and other consuming countries have some leverage here"

When the US finally gets serious about ridding us from the tyranny of oil, the "Saudi royals" will be hanging from bridges as the oil economies of that region will collapse.

Their welfare states will crumble and the people of the region will be returned to the third world status they rightfully deserve.

2008 Jun 15 10:19 AM

[NOWHEREMAN:]

the US and other consuming nations will be asked to consume less. Why? The Middle East has accelerated their consumption to such a degree that they cannot export more...2 Trillion worth of ongoing projects which need energy.

China needs an additional 5% to deal with current expansion and reconstruction efforts due to snow and earthquake.

India is entering Monsoon Season and Brazil is accelerating its drilling efforts. Chinese Olympics will draw millions of chinese using hundreds of millions of gas/diesel brls.. Ethanol/corn prices ae about to spike because of the Monsoon conditions in the Midwest.

Good luck.

Ps this doesn't even include hurricane in the gulf.

2008 Jun 15 11:13 AM

[cynic69:]

"When the US finally gets serious about ridding us from the tyranny of oil, the "Saudi royals" will be hanging from bridges as the oil economies of that region will collapse."

Who in U.S. do you think is going rid of of this tyranny? How do you think we are going to do this? The politicians are too stupid and corrupt. Industry leaders are only concerned about their total income at the end of the next quarter. If John Kennedy or Franklyn Rosevelt were president we could take over the failing car companies and build a zillion electric cars (like we did in world war II). We could abolish long haul trucking and rebuild the rail industry. We could give tax credits for solar upgrades and insist that all new construction be as green as possible. We could stop building freeways (urban sprawl) and prevent folks from commuting long distances.

The truth is that none of these things are going to happen. We are in a world of trouble.

2008 Jun 15 12:12 PM

[Isnt_It_Jus...:]

I agree completely with your article.

2008 Jun 15 01:22 PM

[Karl Francis:]

I fully agree with the article. Speculation is running against fundamentals. The longs are playing the greater fool game.

2008 Jun 16 09:14 AM

[john s. gordon:]

let's hear it for long haul rail transport. your table grapes for east coast consumption are grown in CA using taxpayer-subsidized irrigation water & shipped by truck (3000 miles?)
> jack

2008 Jul 10 08:06 AM

[fireball:]

gailwhitaker yes roosevelt would probably move for socialism he was a socialist but jfk. god i hope not. the man that emerged from the missle crises was several cuts above the man who was elected. i very much doubt that he would take such a wrong direction. remember marx said i would have called it the socialist manifesto but the socialist were so despised i made up a new term. that is not verbatim but gets the gist of his statement. i believe the jfk i remember would rally the country and lead us in the right direction without becoming our own enemies. i know that jfk understood how to raise revenues. you dishonor a great man by suggesting he would lead us into a bottomless pit. i am not with either party. they both suck. i guess i am a constitutionalist. what we learned from jfk was if you do the right thing keep your head down. please see his speech at colombia (i think) university a short time before the assassination. also consider no u.n. action in vietnam and united states notes instead of federal reserve notes. i believe the first thing johnson did was return control of our money to the federal reserve which is not at all what the name implies. i may be wrong but i would not call the man who was shot a democrat or a republican. i would call him an american in the corny true blue sense of the word. i say corny with the utmost respect as a corny guy who believes in honor duty and integrity.

2008 Jul 10 12:22 PM

[MeliS.:]

I do blame this all on the politicians. Look at most of the democratic politicians, they have ties to oil companies. No one seems to remember the Alaskian pipeline. They try to say it isn't being sold over sees. However, 2 billion barrels a day over a period of 20 years. Exactly where is it? Now they are saying it is down to 750,000 barrels a day, my question is still where it is? Why can't we use this in lieu of buying 750,000 barrels? They are selling our oil in Japan for a bigger profit. They refine it there. The oil companies buy from Saudi cheaper than they sold ours to Japan, refine it here and then Jack our prices up. Everyone needs to wise up and all of these people that are tied to oil companys, STOP VOTING FOR THEM. They have proved they don't care about us, but their own pocket books!!!

2008 Jul 15 06:00 PM