Who's the only guy in the WORLD who buys crude oil?
The refiner. If we just go off of Chevron's profit warning from the other day... the company — the 2nd largest US oil company — could not make money refining $70 oil. So if Chevron et al. cannot pass on the cost of $70 oil to vocationally challenged consumers, why then does Wall Street think $80, $90... is justified?
One of two things have to happen between now and the summer:
(1) either crude oil has to correct back towards $60 or
(2) gasoline prices have to surge well over $3 (the national average is now around $2.75) — assuming crude oil stays around $80. If crude oil heads to $90 or beyond, gasoline has to rise in tandem.
A draw in PADD III crude oil supplies in December is expected, i.e., supplies have now dropped in 28 out of the last 29 Decembers. That said, last month’s draw was exceptional as a significant resteepening of the Nymex curve incentivized shippers to move barrels out of PADD III and into the Nymex hub in PADD II.
Case in point, supplies in Cushing, Okla. surged by 40 percent from the beginning of November to a record 35.7 MMbbls by the end of last year. While oil inventories in PADD III always go missing in the month of December, they almost always seem to miraculously [sic] “reappear” in January, i.e., they have increased in 22 of the 27 following Januarys.
As we highlighted in yesterday’s issue of “poor” refinery economics have thus far led to the permanent destruction of 446 Mbbl/d of European and North American crude oil demand and upwards of 1.2 MMbbl/d of temporary demand.
Update: Total is currently enduring a strike by members of the CGT Union protesting the potential closure of the company’s Flanders/Dunkirk, FR refinery. If Total pulls the plug on Flanders, we can then move 141 Mbbl/d of crude oil demand destruction from the temporary column to the permanent one.
Therefore, extant destruction to boil oil along with yesterday’s DOE report shortens the odds that this January will be the 23rd such in which we see a build in GoM stocks. The increase through the first full week of the new year averaged out to a 389 Mbbl/d pace. Whereas that is 40 percent below last year’s (think global recession) 656 Mbbl/d record build, it is currently 70 percent above the long-term mean build.
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.