Stephen Schork
Editor of
"The Schork Report"

It’s clear that despite a downward trend for refinery utilization percentage we’re seeing the amount of product per barrel of crude increase over the last six years. This calls in to question the usefulness of refinery utilization as a useful indicator of how much product we can expect per barrel of crude.

This relationship is especially evident in the aftermath of Hurricanes Katrina (when utilization fell to 69%) and Gustav (67%) but the rate of production held steady. Products remained so strong relative to demand that, after Gustav, their surplus may have helped fuel the bear market of late last year.

Could more efficient production lead to larger builds and thus reverse the bullish sentiment we’ve seen over the last few weeks?

That would explain why last week’s 1.6 MMbbl build in oil was considered bullish, but a 0.66 MMbbl build in gasoline was bearish. If the market continues to fear over-supply in gasoline, expect a contraction of the crack spread.

Fundamentally, gasoline doesn’t seem that bearish: gasoline supplies for the first quarter of 2009 are at a 4% surplus to the 03-07 timestep, while crude supplies are almost 13% higher. Gasoline is also less variable, with a standard deviation per barrel of 0.013 as compared to crude’s 0.032. In a generally bearish market, gasoline seemed the safer option. However, unless demand picks up strongly, last week’s larger-than-expected build could be the turning point in favor of crude.

As we analyze in today’s issue of The Schork Report and illustrate in the Products Ratio vs. Utilization graph, the bottom line is that gasoline supplies should be expected to rise relative to historic values due to more efficient use of refineries and a larger than normal crack spread. In the coming weeks, we can’t expect weak utilization figures to hold back the surge in production of gasoline products.

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Stephen Schork is the Editor of, "The Schork Report" and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.

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