Analyzing Supply & Demand for Oil

| About: The United (USO)
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I've been putting up the data on oil and gasoline stocks here at dismally.com for a while now. The data that is provided by the EIA is fairly useful in that they track our stocks at any given time and provide it weekly. This data has been showing continued supply increases for the past few months. However, there's really been no decrease in price that would show this increase in inventories. There are a few laws that apply to commodities. The most notable is the law of supply and demand. The very law that oil has repeatedly been breaking.

Or has it?

This week's recent data release showed a rise in refining usage capacity of 1.2% bringing capacity utilization up to 92.8%. That sounded good. But, without knowing enough about that statistic, how could I really tell? So I called the EIA and asked a few questions. I was fortunate to have stumped the original person that I talked to, and even more fortunate when that individual's boss was on vacation. I got transferred to the "big boss". Very informative individual.

Some of the highlights of the conversation are:

When considering our own stocks at any given time, there is no real relevance to those stocks and macro world demand.

This is something that I've considered for some time as there's never really been a correlation between the amount of supply we have, and the price. Also...

the actual "supply" we have is not something that we use, per se. It's more of an ability to make the system "work".

What about demand I asked? How do you tell demand based on amount processed, stocks, and import/export differences? That was the question I posed, and surprisingly he answered with that equation.

But, amount demanded is not a factor in determining the amount of draws on supply. There are going to be influxes that influence supply all the time. It's a tough factor to determine. Again, the stocks are not going to determine what was bought or sold. Those are just our stocks. We could produce x one week, and demand the same amount. Then, next week, we could produce 50% more of x and demand the same exact figure. In both cases, our stocks are not depleted. But, looking at amount processed may be your best bet in determining amount demanded. We're fairly balanced.

What about number of days of supply based on stocks? (Without even asking the question, I already knew it was a useless question).

Not really a good indicator of anything, really. It's not a factor that has enough relevance, regardless of how many in finance quote it. Again, it's a factor of ability to process, not what is in the pipeline.

Is your data worth a damn at all?
That actually got a chuckle. In fact, there are two elements of the data that are worth a damn. Capacity utilization and processed output.

So here they are... the "worth-a-damn-charts":

Capacity utilization charts are here:

That obvious spike down in capacity utilization is from the aftermath of Katrina. The reporting date was 6 October, almost a full month after the event. I'm guessing that's how long it takes to process the data and then to report to the general public.

And now for the amount processed:

Here's where the analysis gets to be fun. You have to look at both of these charts simultaneously to get the analysis you want. Take capacity utilization: If utilization is running very low yet we produced an increased amount of gasoline, good news. See, we're at 92.8% of capacity right now. Simultaneously, we are producing a great deal of gasoline. Great news. However, if the amount produced starts to level off while at the same time we see an continued increase in the utilization rate, we're in trouble.

For now, it appears that we are going to be seeing some continued productivity in gasoline processed while simultaneously we are at about average levels of utilization. Price should continue to move lower, modestly.