It’s not what you know, it’s what you don’t that matters.
I cannot begin to tell you that I’m still a bit shocked that a few weeks ago I was defending the $80 floor in WTI. I go away for a few days here and there and the next thing I know I’m trying to explain to everyone how we’re hoping to hold the $75 area. Oh, it’s been a rough couple of weeks, my teeming millions. Rough. I like to think of this period with a nod to shale oil and gas. Who knew? I mean this, who the heck knew? We don’t even have a Roubini that can take credit for the shale revolution. At least I was there to stake some claim for the crude oil rally from $16 in 2001 to $100 in 2007. I was bullish every step of the way.
There was no doubt in my mind during that period that we were headed to triple digits, and I made a nice little name for myself. Of course there was a misstep. That was when I tried to go back to my Econo-head roots and stumped for “oil-flation." I was convinced that once WTI pushed above $80, inflation was going to strangle the U.S. economy and it was going to be doom and gloom. Hmm, at least in my 2009 I had the doom and gloom part right, inflation? Yeah, not so much.
Now we are in a whole new paradox. There are a few out there who are going to lay claim to WTI headed back to their $60 target a few years ago, but the game has changed, and although they are right in principle, they are wrong on the facts. The idea was that the oil production was going to weigh on the weak demand. Well if we’re only talking about the U.S., demand hasn’t been this good. Not only have we cut crude oil imports to just above 7M b/d, we’re practically double the crude production in America. Make no mistake either, we’re using all we can. The refinery runs this year have been at record levels (15.8M b/d) and supply is still a solid 7M barrels than at this time last year (378M v. 386M). We’re ready to turn the machines back on and continue drawing down into spring.
Now I’ll get to the real dilemma that is plaguing the oil markets, the U.S. has the com. It’s not the U.S. domestic production at 9M b/d or that imports are headed to the lowest level since Milli Vanilli won a Grammy. It’s the fact that we’re putting OPEC and the EU out of business. Fact is, it’s a double whammy on the EU. We’re taking away the money they were making from exporting gasoline and we’re pulling money from any new development in the North Sea.
Not only is the North Sea in decline, smart money is trying to find more ways to invest in unconventional drilling. To that note, there’s no denying that with a horizontal drill used in fracking, if there’s a need to halt ops, it will be ale to start right back up with a small percentage that it will lose any production. In a conventional drill, you can stop or reduce production, but you better have you’re lucky rabbit foot and your fingers crossed to get things back to where they were. Things have changed and the price of oil isn’t the old grey mare that she used to be.
CRUDE -1.5M – Sorry for the delay folks I was still basking in the glory of calling this draw last week. It’s hard to type when you’re busy patting yourself on the back. I need all the love I can get with WTI prices down at these levels. Well now that we’re ratcheting up the refineries back from turnarounds, it should help support the crude down here. Look for even weaker imports too.
GASOLINE +1.0M – I’d like to think that the demand is going to come in high and pull down stocks, but these refiners have to keep running high to meet that disty demand. As good as gasoline demand can and will be this Winter, we will catch a break this week with a build on higher production.
DISTILLATE -2.0M – Oh it’s on like Donkey Kong. If anything, America remembers last winter oh-too-well. This cold snap has plenty of folks stockpiling their heating oil tanks, but the real demand that not many outside of me saw coming was diesel demand. As much as we love to go out shopping is as much as goods need to be delivered. This is where we’re going to see solid demand until the end of the year.
UTILIZATION +1.0% - These are refineries. When there’s an opportunity to make money, they need to run and run they shall.
CUSHING -1.0M – Refineries run, Cushing draws. Simple.