Crude inventories are now up, what? 30 million barrels inside of a month and a half?
But that’s not what should have you worried, if you’re long oil like a Societe Generale pig-dog. No, what should scare you, truly, is, why are inventories rising this much, this fast, now, when market conditions have been like this for almost half a year?
I’ve got two guesses. The first is that Europe has actually contracted far enough that multimillion barrel inventory builds are just the normal at these prices. That’s the first guess.
But I’m not convinced that’s right. Europe was spiraling into the abyss much before this, and the oil inventory reports only just recently jumped significantly higher. I would have expected a more consistent ramp in the numbers if this were simply a property of Europe vanishing.
Which brings me to my second guess: alternative storage locations – shadow inventory, if you will – have taken all they can of the oil, and now there’s nowhere left to go but the publicly visible facilities.
And if my second guess is on the mark, then you should be worried – most worried – vagrant oil bulls, because if prices keep sagging, there will be no limit to the amount of oil that will drown any attempt you may have to get to the exits.
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What do lower prices do to the crack spreads and the refiners.Is it a serious reduction in crack or increased demand due to lower px?
Lower prices of what? Price per gallon is a spread between oil cost and labor/capital costs, to the price per gallon of gas. So on the face of it, lower oil prices are good for refiners.
But keep in mind that gasoline demand is at levels not seen since the ’90’s. You can have big dicked profit margins, but sales volume matter too.
I’ve been hesitant to touch the refiners, if only because I think demand for fuel will keep dropping. Bigger profit margins, lower profits…
Thanks for response.Lower prices of oil reduces price at pump (to varying degrees.Would lower pump prices spur demand.
The classical answer is, yes. But secretly, I doubt it. Gasoline is already cheap enough that if you have anywhere to go, you go there.
Cheaper distillates would help transportation profits. But again, what are you transporting? Demand is pretty thin right now.
If we’re going to get a real powerful recovery of fuel demand, we need a corresponding recovery across the economy.
I think where we are, higher fuel prices can derail a recovery, but while lower fuel prices help, they won’t help significantly. What we really need is for the consumer to deleverage a half measure. That will be painful.
Doesn’t seem to be any constituency for deleveraging anywhere on earth.
Mr. CT, your supreme skills with analysis will always be admired by the likes of Internet leeches, such as I. The one thing I definitely respect, is your gut feel on such matters (oil supply flux, ebb and flow, etc.) I was perplexed by the whole Obama/Strategic Reserve thing. I do know for sure that Prez. Obama with his strong commitment to “compromise” had no issue with continuing to take care of Bush cronies and their need for higher oil prices. I do get the sense that by sheer lack of physical space we are nearing that end game. I often wonder if we look the other way while oil flows to taboo places like Hugo Chavez land (to be redistributed to an even higher scale of taboo, places). Anyway, I love the thesis, but again, am always aware of the Black Swan that can come by and kick down our sandcastle. Very perplexing, especially when you consider the whole “cheap natty, warm winters” enchilada. I may need to follow your lead and dip into some ERY or ERX puts or something. Thanks again for all your insight.
Thank you, horstradin.