Wednesday Morning – Oil Inventory Day

What’s driving gasoline prices higher? RBOB is up $0.40 in the last two months. A confluence of three events are forming what the MSM habitually refers to as a perfect storm: low refinery utilization, low imports, and strong contra-seasonal demand. I prefer to think of gas prices as sitting on top of a three-legged stool. Solve any of the three problems and the crushing weight of above average gasoline inventories brings prices toppling down.

• Utilization Is Depressed By A Plethora Of Snafus. The first is the unusually low levels of refinery utilization the US is experiencing at present. We’re in the first of two maintenance seasons for the year and things haven’t gone well. At present utilization is only 85.9% (below the three year average of 88% but above last year)  due to several high profile refinery fires and extended maintenance cycles at several large facilities.

• The second factor is falling finished products imports. This is a function of: 1) logistical issues with the the Houston Ship Channel and 2) reduced tanker loadings. As you can see in the following chart, gasoline imports have been declining in recent weeks during a period in which they are normally rising. This is worth close monitoring since a reversal here could quickly lead to a reversal in gasoline prices.

• Demand has been unusually strong year to date.   Enough said, it’s true. People buy more gasoline when it gets close to $2 per gallon and they have very short memories.

The relatively low levels of gasoline production and the reduced imports with three months left until the beginning of the U.S. driving season have induced a panic stricken atmosphere in which reality and perception have diverged by a country mile.

• The sad thing is is that the mainstream media portrays the situation as especially dire despite the fact that gasoline inventories, at least before today’s report remain above the average range. If you don’t believe check out the energy portion of our site today to see a nice set of graphs pull directly the government showing current gas and oil stocks.

• My Thanks to El Diablo for his vigilance as he posted a great set of headlines portraying the rocky situation with Nigerian rebels and the threat posed by Iran’s nuclear defiance. The funny thing was that those headlines were from March of 2006! Even the accompanying stories could have been complete cut and pastes.

The Truth is that inventories remain above average, not just crude but gasoline and heating oil (need proof?) and my sense is that as the snafus sort themselves out we’re headed for a test of the $55 level in the near term, say 1 to 2 weeks, unless today’s numbers show a significant decline in crude again or the gasoline number is just atrocious…something over 2.5 mm barrels.

Oil: Down nearly $4 in the last four days .In my book, yesterday’s failed attempted to retake $60 translates into the statement, “what was support now becomes resistance.” Now more than ever I think we make a move on $57.50 and then $55. Inventories, if hinky, could give a bit of a boost but the writing is on the wall between moderating weather, a gasoline situation which is at just about the worst I can imagine right now and an OPEC meeting where nothing will happen.

Expectations from a variety of surveys for today’s inventory report looks like this:

• Crude: up 1.9 to 2.0 million barrels. The alleviation of the supply bottleneck at the Houston Ship Channel should help bring this number back into positive territory after last week’s surprising withdrawal.

• Gasoline: down 2.45 million barrels. Should this number come in as expected gasoline inventories would still be above average for this time of year. A bigger than expected draw here would likely send crude back up over $60.

• Distillate: down 1.8 million barrels.…We could still get a big number here from secondary and tertiary demand sources but i’s unlikely to be oil price moving unless it doubles the expected draw.

• Utilization: rising to 86.3%.

So What Hasn’t Felt The Sting Of Falling Commodity Prices Yet?

• The refiners for one which are touted daily as the best buys on the planet despite the huge run the group has experienced since the beginning of the year. Crack spreads are up, no doubt about but the multiple expansion feels overdone here. When reformulated gasoline (RBOB) cools there will be some profit taking to say the least.

The rest of my put picks from Monday have performed pretty well. I know it’s only two days in a rotten market but the variances in the performance of the different categories (taken from Monday’s post) demonstrates that in many cases the sell off has been a thoughtful process and not just a “sell the sector” event. The damage has been worse where you would expect it to be: the higher cost producers.

Odds & Ends

OPEC Meeting Watch: No one expects them to do anything. Ministers from Qatar and Algeria have repeatedly commented over the last couple of days that no no further production cuts are necessary.

Analyst Watch: CVX upgraded at DB