The U.S. and Canadian major oil companies will be drowning in crude oil by the end of this year if they keep operating at their current rates. They are already swimming in crude oil and finished products inventories with refineries running at an acceptable economic level of efficiency. U.S. and Canadian oil refineries will be reducing overall inventories between now and the end of the year for Last In/First Out (LIFO) accounting purposes.
As of late, crude oil trading has been a virtual skating rink, where every 15 minutes the announcer comes on and says to reverse direction. On the other hand gasoline refining is like NASCAR racing with speeding cars going around the track as fast as they can.
Oil refineries, much like race cars, are built to operate at maximum capacity and efficiency to produce high volume of products. Currently, U.S. refineries are operating at their lowest efficiency in recent history down to an 80.6% level down from 85% just two weeks ago per the Energy Information Administration weekly Department of Energy (DOE) inventory report.
Refineries typically switch some of their production from making gasoline to heating oil this time each year. However, diesel inventories are already at a 25-year high inventory level per last Wednesday's DOE report.
This sets up an interesting scenario on how refiners will be able to get rid of inventories, with an over abundant supply of gasoline and distillates including diesel #2, jet fuel and heating oil already in the market. This is at a time when overall demand for distillates is down about 10% and gasoline is flat to up a small amount. The fight between crude oil exporters and refiners is also ongoing with Saudi Arabia cutting back on crude oil shipments to wait out this end of the year phenomenon.
The U.S. major oil companies can afford to sit back and wait it out since they are still making money on the crude oil side of the house at the current $80 a barrel price. Independent refiners such as Sunoco (NYSE:SUN), Valero (NYSE:VLO) and Tesoro (NYSE:TSO) without their own crude oil production have not been so lucky. Valero just last week completely shut down of their Wilmington, CA refinery for 40 days due to economical reasons. That was the third one of their refineries to be either mothballed or completely shut down while the market is sorting out itself.
The Valero shutdown is a very unusual move in the California market where demand for gasoline has remained relatively stable. The inevitable outcome will be that gasoline, diesel and heating oil prices are going to decrease between now and the end of this year in order to deplete abundantly high level of finished products.
By the U.S. Thanksgiving, additional imports of gasoline into the U.S. from large overseas and very efficient refineries in India and China, will further complicate the pricing picture. Those refineries do not have the same environmental concerns as their U.S. counter parts and are able to produce the winter grade high Reid Vapor Pressure gasoline at very economical prices.
Another big bomb shell to hit our industry will be revelations of insider trading for crude oil and products by the major oil companies. The first one to come out into the daylight will be British Petroleum (NYSE:BP), the same Beyond Petroleum company bandied about in their commercials.
In August 2009, Oklahoma State Attorney General Drew Edmondson filed a lawsuit against BP/Arco in June 2009. He is accusing them of gaming the price of gasoline and crude oil since 2002. This alleged scheme had previously been brought to the attention of the Federal Trade Commission but Edmondson claims to have found fresh evidence that BP was able to manipulate gasoline prices by hoarding short-term motor fuel and crude oil supplies.
The only ones who are assured to make a profit in today's market are Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS). In Las Vegas, bettors only brag about their big winnings and quickly forget about losing it all back to the house because they kept on gambling.
Meanwhile GS, with their super high speed computers and software, can make high volume trades on small differences in the prices of commodities with crude oil being their fat calf again this year. NASCAR racing and taking a spin around the skating rink are great sports activities. For those with short memories, remember who was left holding the bag last year after the big hedge funds dumped their crude oil contracts on the market at a huge loss. Just be careful going into the turns and watch out for those sudden changes in course, they could come back to bite you where it hurts you the most, your wallet.
NASCAR racing and taking a spin around the skating rink are great sports activities. For those with short memories, remember who was left holding the bag last year after the big hedge funds dumped their crude oil contracts on the market at a huge loss. Just be careful going into the turns and watch out for those sudden changes in course, they could come back to bite you where it hurts you the most, your wallet.Disclosure: The writer does not have any investments in equities or commodities.