Last Thursday the U.S. government reported that net commercial crude oil stocks fell by 5.4 MMbbls or 1½% to 363.1 MMbbls. On the major products side, ?2 oil continued to build, while gasoline continued to fall. As far as the latter is concerned, stocks fell by 0.54 MMbbls to 203.4 MMbbls. Over the last four weeks supplies have dropped by 13.9 MMbbls. But, here at we think that about to change.
Per last week’s report it is clear we are at the seasonal dy/dx moment as it were, i.e. the point in the market when crude oil supplies shift from weekly net builds to net draws. For instance, production of finished gasoline surged. In this vein, a lot of oil had to be boiled to generate this surge. Regardless, gasoline supplies fell. That is a concern, especially the situation in the East (PADD I).
Two weeks ago crude oil throughput dropped 5% to 1.2 MMbbl/d in the East. Consequently, PADD I supplies of gasoline dropped 2% to 52.7 MMbbls in the lead up to the start of the Northern Hemisphere driving season. A year ago supplies of gasoline were 55.3 MMbbls and the average of the 2003/2007 timestep is 56.2 MMbbls. So supplies are a few million barrels or around 5½% below recent metrics.
Be that as it may, there are signs that allow us to be cautiously optimistic. For starters, last week’s numbers in the East were undoubtedly skewed to some degree by unplanned outages at Sunoco’s Marcus Hook and Valero’sDelaware City facilities. These outages compounded Sunoco’s April decision (based on economics) to shut-in one of its two FCC units at its Philadelphia (335 Mbbl/d) refinery.
The situation for Sunoco in Philadelphia was further complicated last week after “mechanical problems” caused the brief shut-in of the facility’s other FCC. Both Valero and Sunoco are in the process of restarting units. However, we will likely see a residual impact in this morning’s report. As such we will likely see a smaller than normal (1.5 MMbbl) build for last week. That’s the bad news. On the other hand, overall capacity utilization has since risen by 330 bps to 85.1%. Thus, despite the pullback in PADD I, nationwide production of finished gasoline jumped 7.4% to a 39-week high, 9.4 MMbbl/d.
The ratio between crude oil supplies and gasoline over the last four weeks averaged 1.78. Last year this ratio was 1.53 and the 2003/2007 average is 1.56. Meantime, refinery utilization is only 84%, whereas a year ago it was 87.9% and the five years prior to that it was 93.1%. In other words, the seasonal response from refiners has been lax thus far; hence, gasoline supplies relative to crude oil are under stocked.
Given the improvement in economics, is looking for another strong production number this morning and in the weeks ahead we will look for the crude oil/gasoline ratio to narrow as stocks in the nominator fall faster than the denominator.
For tomorrow’s EIA report, which incorporates the Memorial Day holiday, the market will be looking for a seasonal injection of around 117 Bcf, i.e. the typical injection is 117 Bcf. Last year the EIA reported a 105 Bcf injection for the corresponding week (23-May-08). Keep in mind, tomorrow’s report, along with the report following the 04th of July holiday is typically the largest report of the season. In this vein, nationwide implied weather demand for the report was mixed, i.e. above normal in the Southwest, below in the Northeast.
Stephen Schork is the Editor of, and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.