More Off-Base (Way Off-Base) Oil Forecasts

By Brad Zigler

After a week in which the oil bears punched through the psychologically important $100- and $90-a-barrel price levels, traders were fixed on this morning's Energy Information Administration (EIA) inventory report.

November crude oil was lower overnight after a better-than-$2-a-barrel bounce in Tuesday's NYMEX floor session as traders lined up in anticipation of a bearish report.

Pre-report estimates called for a build in crude oil stocks of around 1.8 million barrels. Gasoline supplies were expected to increase 800,000 barrels, and distillate inventories, which include heating oil and diesel, were forecast to decline by 500,000 barrels.

When the numbers came out, many traders might have wished they'd gotten into the "Very Bearish" line. U.S. commercial crude oil inventories, it turns out, increased to 302.6 million barrels, a whopping 8.1-million-barrel increase from the previous week, nearly putting oil into seasonal oversupply.

Some intimations of oversupply showed up in yesterday's market. Crude's quarterly backwardation widened to $1.61 a barrel Tuesday, bolstering notions of more-aggressive producer hedging in the back months. The move came on the heels of yesterday's EIA forecast for lower U.S. oil demand in the fourth quarter. Estimates now call for demand to fall to 20.25 million barrels per day (bpd), down 1.6% from year-ago levels. For the full year, the EIA predicts an 830,000-bpd decline to 19.85 million bpd.

NYMEX Spot Crude

Refineries were unexpectedly busy ramping up their hurricane-season production. Capacity utilization was 80.9% last week, well ahead of the 78% rate forecast by industry insiders.

As a result, the crude oil supply shock was matched by an equally startling increase in gasoline inventories. Stocks increased by 7.2 million barrels last week, nine times greater than industry forecasts. Demand for gasoline averaged almost 8.8 million bpd, down by 5.3% from year-ago levels.

The forecast for distillate fuel inventories, which include heating oil and diesel, were on target, though. Supplies fell by 500,000 barrels in the face of an 8.3% decline in demand from this time last year.

Crack Spread

Refining margins, translated through NYMEX crack spreads, slipped to their lowest levels of the year, barring the anomaly following the short squeeze in the expiring October crude contract last month (to learn about crack spreads, see "Time For Crack Spreads?"). At $3.62 a barrel, refiners' gross profit margins are now 4%, less than half what they were just one week ago. Last Tuesday, margins stood at 8.6%. Refiners could make 9.5% this time last year.

NYMEX Spot Crude Vs. Refining Margins

Natural Gas Spread

Crude oil's premium over natural gas resumed its post-Labor Day shrinkage after the credit market disruption worked its way through the petroleum complex. The premium, which stood at more than $11.66 per million British thermal units ((mmBTU)) at the beginning of September, has now contracted to $8.76 mmBTU (for an explanation on the spread's workings, see "Spreading Oil And Natural Gas"). On a one-for-one contract basis, the spread's contraction has produced a 98% return on margin.

Crude Oil Vs. Natural Gas

Comments

[NOWHEREMAN:]

Hurricane this, hurricane that.

I would imagine one should compare gasoline usage for a comparable period. Try comparing immediately post Ike to say post katrina. I would imagine that oil inventories would have spiked also as distribution networks were not fully functional and power to affected areas had not been restored; no movement, more inventory.

The same could be said about gasoline usage. Last year a hurricane did not disrupt usage at the same time.

I do not know what the actual figures are and I do not really care. But when projections are made, I would like them to be on an apples to apples basis.

2008 Oct 09 09:45 AM

[Managing Ed...:]

Pautaut -

If you don't follow the numbers, you also don't follow the trends.

These numbers aren't isolated one-offs. They're the continuation of a trend that began before Ike was spawned.

2008 Oct 09 02:33 PM

[Alex_G:]

What exactly is the author trying to say here? Are oil price predictions too low or to high?

2008 Oct 09 10:24 PM

[Managing Ed...:]

Not oil price predictions. Not even too high or too low. Just that consensus expectations of production and suppliy are notoriously inaccurate.

In recent weeks, the best Oil Patch prognostications have been 1-for-4 (oil stocks, gasoline and distillate inventories and refinery utilization).

The predicitions are made on the eve of the weekly EIA report's release. They're simply not good guideposts for trading.

2008 Oct 10 10:03 AM