Bullishness for the rest of the economy does not translate to bullishness for the energy industry.
Yesterday (Wednesday), the United States Census Bureau released its latest monthly wholesale trade report which covered inventories and sales for January. Analysts were expecting a 0.2% increase in inventories so the -0.2% decline was considered bullish — companies cannot keep up with demand.
For instance, the inventories/sales ratio for electrical and electronic goods dropped from 1.38 in January 2008 to 1.13 in January 2009 as everybody and their brother bought a new Flat-screen-TV/GPS/The-latest-pointless-gadget-Apple-is-charging-$800-for.
However, bullishness for the rest of the economy does not translate to bullishness for the energy industry.
Yesterday, Uncle Sam reported a seasonally small 1.4 MMbbl increase in crude oil stocks. The historical average for this timestep is 3.0MMbbls ±1.9MMbbls so today’s build remains within ’s stated error range. The build was split evenly across market areas with only the West Coast (PADD 5) reporting a tiny 0.005 MMbbls draw. All told, total crude oil inventories stand 2.4% below 2009 and 10.4% above the preceding five year timestep.
Builds seem likely to continue as crude production rises and North America enters peak turnaround season (where refineries reduce production for maintenance). Thus capacity utilization fell by a large 1.14% and crude oil inputs fell for the second consecutive week, to 13.9 MMbbl/d - but crude production saw its fifth weekly increase and is now 1.0% above the start of February.
We have no shortage of crude oil, quite the opposite; but convincing refiners like Chevron (who announced their intent to sell Pembroke, their only European refinery) to purchase it at market prices is getting harder and harder.
Little surprise then that gasoline stocks fell by 3.0 MMbbls to 229.00 MMbbls. Before the bulls get carried away, they should consider current stock levels and the makeup of the draw. The East (PADD 1) and West (PADD 5) saw small builds but these were negated by large draws in the Midwest (PADD 2) and the Gulf Coast (PADD 3). Thus the year-on-year surplus for PADD 2 and 3 narrowed from 6.4% and 4.8% to 3.4% and 2.4% respectively. But the total stocks y-o-y surplus increased from 7.6% to 7.7% and now stands 4.0% above the 2004-08 timestep.
Further, the shortage of products may have less to do with demand and more with refinery margins/maintenance as mentioned above. Mogas production fell 0.07 MMbbl/d to 8.8 MMbbl/d. Meanwhile demand remains mixed, a 0.1 MMbbl/d increase brings 2010 0.2% above last year but 0.8% below the 2004-08 timestep.
Moving on to the middle of the barrel, total distillate stocks fell by a large 2.2 MMbbls, well above analysts’ expectations of a 0.75 MMbbl draw. The draw was especially pronounced in PADD’s 1 and 2, which saw +1MMbbl draws while PADD 3 saw a small 0.5 MMbbl build. Surprisingly, demand fell by 0.18 MMbbl/d as the weather gets warmer sooner than expected.
Thus, we place less emphasis on weather related demand and — like gasoline — more emphasis on lower production. Last week production fell 0.16 MMbbl/d to 3.65 MMbbl/d, well below the 4.2 MMbbl/d for March 2009 and 3.4% below the 2004-08 average of 3.78 MMbbl/d.
During the aftermath of the Gulf War and through the rest of the '90s refiners were finding it very hard to remain profitable. Thus, they became more efficient, cutting costs by holding lower inventories. The inventory/sales (i/s) ratio dropped from 0.40 in June 1993 to 0.29 by February 2000.
When the commodity bubble began, refiners maximized high-cost/less efficient refineries under the assumption that prices and demand would hold. As the graph in today’s issue of illustrates, the i/s ratio inevitably spiked to a record high of 0.49 as the recession hit and inventories piled up in the face of weak demand. But unlike i-pods, the i/s ratio for January 2010 did not fall, instead rising to 0.43 from 0.42 in December.
This can partly be explained by the drop in demand due to winter — gasoline supplied in January was 0.4% lower while distillates were 0.4% lower.
Another aspect is that refiners remain relatively inefficient, but as the high cost refineries are shuttered we expect efficiency to improve.
Running a regression, we will need to see demand improve by 1.5% before the i/s ratio drops below December 2010’s value and an 8.6% increase in demand before the i/s ratio returns to prerecession levels.
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.