Can crude oil go to $95 this year? Of course it can.
Yesterday (Wednesday), the U.S. government reported that net commercial crude oil stocks plunged by 3.9 MMbbls or 1.2%. Draws were reported in all five market areas (PADDs). Overall inventories dropped to 326.7 MMbbls. As a result, the deficit to a year ago ballooned by 500% to 12.2 MMbbls (-3.6%) and the surplus to the 2004-2008 average narrowed by 22% to 25.5 MMbbls (8.5%).
On the major products, supplies of No.2 oil rose by 0.36 MMbbls (0.2%) to 157.5 MMbbls. A 1.28 MMbbl build in ULSD (<1.5×10-5) fuels offset a 1.24 MMbbl draw in LSD (>1.5×10-5 >5×10-4). Meantime, heating oil (>5×10-4) supplies in the East (PADD I) rose for the first time since November. Supplies of gasoline rose by 1.99 MMbbls (0.9%) as a slight increase in demand was offset by a strong uptick in imports.
On the periphery, propane stocks saw another huge draw, 4.3 MMbbls (-10.5%). As a result, the disposition to the corresponding report from a year ago fell to 22.5% or 10.7 MMbbls. Finally, at the bottom of the barrel, No. 6 oil supplies fell by 2.6% to 37.8 MMbbls.
- Weather-related disruptions in the GoM (PADD III) came home to roost. Imports of crude oil into the U.S. refinery epicenter plunged 13% to 4.3 MMbbl/d. Through the first three full reports of the new year, imports averaged 1.03 MMbbl/d (-18%) below a year ago and 1.2 MMbbl/d (-20%) below the 2004-2008 average.
Imports also dropped in the East (PADD I), but surged in the Midwest on the resolution of the disruption to the Enbridge pipeline.
Last weekend’s closure of the Sabine Neches Waterway will only add to further confusion and greater volatility to GoM shipments in the weeks ahead.
- Crude oil inputs into GoM refineries fell last week to the lowest low (exclusive of hurricane related disruptions) since February 1997, 13.6 MMbbl/d. This week, refiners scaled back output in accord with the closure of the Sabine waterway, hence, next week’s reported inputs shall be low as well.
In this regard, a couple of recent, seemingly incongruous, headlines caught our eye:
Refining Profit Stays Weak on Overcapacity, Ernst & Young Says
(Bloomberg, January 24)
Morgan Stanley Expects Oil to Rise to $95 on Demand
(Bloomberg, January 25)
$95 crude oil on “strong demand”… huh? Did anyone on Wall Street see Valero’s earnings yesterday?
Ernst & Young is telling us about overcapacity in the refining sector. We suppose that is why 446 Mbbl/d of European and North American refinery capacity was closed permanently in the fourth quarter and why another 663 Mbbl/d was fully shut down indefinitely and 560 Mbbl/d was partially shutdown.
In other words, upwards of 1.7 MMbbl/d of demand for crude oil disappeared at the end of 2009. Why? Because refiners could not pass on the cost of $70 crude oil to consumers in Europe and North America.
As such, there is a growing consensus in the market that anywhere between an additional 1.0 to 2.0 MMbbl/d of refining capacity has to be shuttered to accommodate the lack of demand in the market.
Is this the “demand” Morgan is talking about?
Look, we will not fight the tape in oil. Can crude oil go to $95 this year? Of course it can. As of Monday’s edition, 2010 confidence interval (65%) was in between $62.58 and $94.74. Thus, market volatility, fueled of course by a lot of Wall Street money, indicates that $95 oil is well within the realm of possibilities.
Mind you, that does not mean it is fundamentally justified. After all, if Chevron could not make money with $70 oil in Q4 2009… how is it going to make money with $95 in Q4 2010?
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.