Economist: Distillates, Cushing & Petroleum Report - May 5, 2011
Issued 2-3 times per week. EnergyEconomist
|As we have discussed, total U.S.
crude oil stocks are not a good measure at present because they are
distorted by excessive inventory at Cushing Oklahoma, which is the
delivery point for the NYMEX crude oil contract. Only 20-25 million
barrels are necessary at Cushing to serve the needs of refiners
downstream from the Oklahoma tank farm. The current stock is 40.5 million
It looks to be a year before there pipelines are constructed to move the oil from Cushing to the Gulf Coast (See Crude Oil Stocks below.) Until then, 15-20 million barrels of the oil at Cushing are stranded unless you are willing to ship the excess oil by rail, truck and/or barge to the Gulf Coast at greater expense than pipeline costs. When comparing current oil stocks to historical norms either current stocks should be reduced by 15-20 million barrels or the historical norm should be increased by the same amount. It also means that crude oil at Cushing will continue to trade below the world market and Brent crude should remain at a premium to NYMEX instead of the normal $2.00 to $3.00 discount.
Distillate stocks also appear to be inflated. They are much higher than the historical norms, but for different reasons.
In the product category of distillates, which includes diesel and heating oil, stocks total 146.5 million barrels compared to the 5-year average of 119.7 million. Distillate consumption is 3.873 million barrels per day and slightly below the 5-year average of 3.910. Since the end of 2008 distillate stocks (red) have consistently ranged from 20 to 30 million barrels above the norm (green).
Click on any graph for a larger version in your browser.
April demand for distillates for distillates at 3.8 million barrels per day was equal to the 5-year average for this time of year. With normal demand, why is the industry maintaining higher than normal inventories and producing more distillates than the U.S. can consume? The short answer is that it needs the inventory to satisfy the needs of its customers abroad. Distillate exports are up dramatically since 2007. Exports went from 268,000 barrels per day in 2007 to 656,000 b/d in 2010.
Distillate exports are up dramatically since 2007. Exports went from 268,000 barrels per day to 656,000 b/d in 2010. Imports dropped from 304,000 b/d to 223,000 b/d over the same period. The U.S. went from a net importer of 150,000 barrels per day in 2006 to a net exporter of 433,000 barrels in 2010.
To serve the larger export market it is necessary to maintain higher stocks so that when a product tanker pulls up to your terminal you can load a few hundred thousand barrels of distillate for overseas shipment. Stock coverage of distillates, which is the number of days stocks can cover U.S. consumption is up about 10 days on average from early in the century. Since higher stocks are not needed to cover the domestic market our conclusion is that it is to guarantee product for the export market.
If that argument is not sufficient to convince you, then we need only look at where the additional exports are coming from and the stocks in that area. It is all in the Gulf Coast region - think Texas and Louisiana. Of the 388,000 b/d increase in exports between 2007 and 2010, 356,000 b/d came from the Gulf Coast. Of the 30.5 million barrel increase in distillate stocks over the same period, 19.9 million barrels was in the Gulf Coast Region.
If you reduce current stock by 30 million barrels or raise the average by a similar amount to adjust for stocks necessary for the higher export market, then distillate stocks are not high. They are normal.
Crude Oil Stocks
We are repeating our discussion of the impact of stocks at Cushing and the anomaly between NYMEX and Brent price with updated graphs for new subscribers. Historically, high stocks at Cushing tend to depress the NYMEX front month (June) for the last data point) futures price relative to the second (July) and successive months. However, the likelihood that high stocks will persist for a year lowered the expected price at Cushing relative to international crude for the next year.
When the NYMEX front month price is depressed because of high local stocks at Cushing it causes NYMEX to drop below Brent until stocks return to normal. You can see the contango in NYMEX (black line on right) correlates well with the spread between the price of Brent and NYMEX. When stocks are high at Cushing the front NYMEX price would be depressed relative to the second and that would cause the front month for NYMEX to trade below Brent. A strong contango in NYMEX leads to Brent trading higher than NYMEX rather than the normal $2-$3 below.
That correlation is not true today, because of new crude coming to Cushing from Canada, the Bakken formation in the North Dakota and adjacent states and provinces, and the lack of a pipeline from Cushing to the Gulf; there is no expectation of lower Cushing inventories by the market and the forward curve for NYMEX crude is relatively flat.
The market anticipates there will be a surplus at Cushing for a long time. Even though Brent is in Backwardation it is still at a premium to NYMEX a year out. (see maroon line in NYMEX & Brent Strip graphs).
NYMEX and Brent futures markets anticipate flat or lower prices. With the expectation of lower or even flat prices there is no incentive to maintain higher than normal stocks of crude oil, but total inventories are higher than last year and near the level of 2009. As we noted a month ago, when Cushing stocks are removed the picture is very different. Stocks without Cushing are low relative to 2009 and about the same as 2010.
Stocks, excluding Cushing, are rising as they do in the Spring, but probably not to usual levels. We expect the industry to maintain lower stocks than in the last two years. However, if the economy weakens they could rise with weaker demand.
Looking at the East Coast region (PADD 1 in DOE-speak), in the last few weeks stocks are up to last year's level, but there are some refineries down for maintenance. Refinery input is up about 400,000 barrels per day or 3 million barrels per week of refinery capacity is back on line, but East Coast crude inputs are still 200,000 less than in 2009 and 2008. If the refiners were near normal the stocks would be below the last two years.
In the Gulf Coast Region (PADD 3), stocks are up. We put this down to weaker demand.
The West Coast Region (PADD 5) is up to last years level and we expect a more seasonal increases.
Low to flat price expectations should make refiners cautious about holding more crude than they need. Low crude stocks in in most of the U.S. could send a false bullish signal to the market. In other words, it may not be lack of supply but prudent inventory management.
In this week's report demand was down 5.8% from the same week last year with gasoline use off 3.7%.
In this week's EIA report stocks were bearish for crude when viewed from the weekly data, but bullish for gasoline relative to crude in the short term.
Petroleum consumption fell 1.256 million barrels per day to 18.332 million b/d. The 4-week average was 19.113 million up 265,000 b/d from a year ago. The weekly data is notoriously volatile and the more stable 4-week average is generally a better indicator. However, the lowest level of weekly consumption since early November 2009 is not a number to be ignored.
The high price of gasoline is taking a bite out of consumers pocket books and consumption is down. Gasoline consumption for the week is down 205,000 b/d at 8.943 million b/d and down 339,000 b/d from last year. The 4-week average gasoline consumption at 9.084 million b/d is 255,000 b/d (1.9%) lower than last year.
Distillate consumption was up 156,000 b/d for the week at 3.893 million b/d. The 4-week average of 3.886 is 251,000 b/d (6.9%) higher than a year ago. If the 4-week average drops below last year we will take it as a bearish indicator of the economy as most goods move by diesel powered truck. We have seen diesel consumption overstated in the weekly reports before when diesel exports were underestimated and the higher exports showed up in lower domestic consumption.
Petroleum stock coverage (number of days of crude and product inventory on hand) at 54.5 days is still above the April average of 52.6. If we remove the excess barrels at Cushing, days coverage is about normal and neutral to bearish.
NYMEX Prices for May 4, 2011
|Crude Oil & Refining|
|Residual Fuel Oil
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