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Countdown to $50 oil????

by HiD Thu Oct 6th, 2005 at 07:39:31 AM EST

With apologies to Jerome (who will be right eventually) there are a number of good reasons why crude oil prices are dropping and will likely stay down unless winter bites really hard this year:

Upward forces:

  1.  Fear -- will there be a big hiccup in a producing country such as Saudi/Nigeria/Venz.  Readiness of the EIA to sell into shortages is mitigating this fear.
  2. 1.4 MMBD of crude production down in the USGC.
  3. Hedge funds holding length leaving the trade short and nervous

Downward forces:

  1.  Demand destruction -- mogas at $3 bucks and jet fuel over $2 is starting to really bite hard.  US oil demand was down 3% (600 MBD).  Some of this is lost industrial demand on the USGC due to hurricane damage.

  2. Saudis offering crude with no takers.  While lighter crudes make more mogas, heavy sours produce more fuel oil which may well be needed to offset the loss of natgas for electricity generation (sorry birds/lungs).  

  3.  more refinery throughput lost than crude production.  Right now there's about 500MBD to 1MMBD more lost refining capacity on the USGC than lost crude production capacity.  Sounds like most of the refineries will be back within about 4 weeks though.  Only the 3 near NO + Valero Pt. Arthur sounding really screwed.  Chevy Pasc may start some units with Oct, and most by T-giving.

But why are products fading too?  First, imports to the US are gushing.  Mogas imports are up 500 MBD as European/S.Amer/other refiners keep refineries maxing mogas in a period that ususally has mogas demand slumping.  Diesel/heat imports are up 200 MBD as well.  Even with all this production lost, diesel/heat stocks only dropped from 133 MMB to 128.  We're not that far off last year's stock levels (lucky to have been ahead of the curve a bit).

Demand destruction.  Once people change habits they don't rush right back to piggery.  And it's not like the pump prices are moving down much.  My price at the pump is still up from $2.85 to near $3.40.  We've shut down most optional trips just on general principle.

Refineries are deferring maintenance from this fall to next spring (get ready for high mogas next April/May) to play catch up.  

Hoarders arms are getting tired.  At some point you sell your "fear" stocks rather than have your ass handed to you when/if the bottom drops out.

Recession brewing?  Stock market thinks so at least this week.

Oil prices could drop even as high natgas screws the US royally.  $14+ gas (effectively $84 crude on btu basis) is deadly for the plastics industry (ethylene etc come from gas in the US instead of the naphtha feeds of Europe) and will crush the east coast and midwestern home heat end users.  These folks have not yet begun to pay up while their newspapers are screaming the bad news.  You have to figure that with natgas doubling in price, utilities are doing everything they can to burn less while maximizing coal and still the price is rising.  This does not bode well for winter..

Jerome may have to wait a couple of years for the 3 digit crude barring Al Qaeda taking out Ras Tanura.  Yet we may have 3 digit natgas equivalent (about $16.5) very soon indeed.

Fair warning:  my bet in the pool is about $52 so I'm talking my book.  Even a cheap bottle of Cremant is enough to influence the average oil trader.


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All good points.

There is no tension on the oil side due to refinery losses. There is no tension on the product side thanks to the 1 mb/d product deliveries from European strategic reserves. But how long is that going to last?

Don't you think that the market is very unusual in that there is a very short term excess of supply at the same time as a strong likelihood of inverse imbalances in the medium term?

I'll stick to my end of year bet of 100$ for oil.

Your points on natural gas are of course well noted.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Oct 6th, 2005 at 11:23:34 AM EST
Mogas deliveries from Europe could last all winter.  I'm 10 yrs out of date and a few refineries there have bit the dust since, but back in the dark ages, we stocked European components in every tank we could find against spring price spikes in the US (esp. California).

At these mogas cracks ($1.87=$78.5-$62 =$16.5!!!) any refiner will keep runs at max till doomsday.  Winter cracks used to be about $3 with heat about $4....

How much mogas is really coming out of tank from the stragetic reserves?  Much of the planned releases from the SPR never happened as no one wanted/needed it.

by HiD on Thu Oct 6th, 2005 at 01:05:25 PM EST
[ Parent ]
fuel oil which may well be needed to offset the loss of natgas for electricity generation

How can the switch be made, how fast, and at what cost?

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Oct 6th, 2005 at 11:47:52 AM EST
 There used to be quite a few generating facilities along the US EC from FL to New England that burned 0.3% sulfur to 1.0% sulfur fuel oil.  Many may well have had burners changed out to use gas (except in FL where gas is limited) or simply left idle.  If idle, they can re-start fast.  If they have to put oil burners back in, a few weeks.  

The turbine based stations cannot switch to fuel oil, but they can burn diesel/jet if they have tankage and liquid fuel injection facilities.  (I don't know much about US power stations so no idea if the turbine stations have liquids facilities.  I handled the Euro side of our biz.)  With gas at $84/bbl and diesel at $2/g=$84 that won't happen on economics, but if there is no gas for the power stations vs mom's furnace getting first call, you'll see liquid fuels burned.

Europeans had quite a few stations that burned HS and 1%,  Italy (ENEL) was a huge fuel oil buyer due to fierce resistance to nukes.  But the Irish, English, Danes, Belgium, France???(trying to remember who else I sold to) could and did burn HS when the economics suited.  There was an entire forward physical market based on 20KT parcels delivered Northern Europe basis a station in the Thames called Littlebrook (LittleBrook Lotto -- it died due to lack of interest about 1994).

There may be new pollution laws limiting burning HS on both sides of the Atlantic, but as we've seen, when people get cold those go out the window.

Swapping out burners is not a huge job.  What is more likely is that industrial natgas users just lay people off and shut down, leaving the gas for home heat.  At these prices, if you have a purchase contract for gas at $6/MMSCF and can sell it back at $14, you probably make more money just selling the gas back.

by HiD on Thu Oct 6th, 2005 at 01:20:40 PM EST
[ Parent ]
Well, the hurricanes might have taken out some of the consumption that otherwise still occured, but is this possibly indicative of greater demand elasticity for gas that earlier thought?
(http://www.bloomberg.com/apps/news?pid=10001099&sid=aW_4KHfUFrhw&refer=energy):

``Demand destruction'' may eliminate the need for emergency fuel releases after Hurricanes Katrina and Rita idled 19 percent of U.S. refinery capacity, the International Energy Agency said yesterday.

U.S. demand for gasoline in the four weeks ended Sept. 30 fell by 2.6 percent from a year ago, the U.S. Energy Department said two days ago. Imports of the fuel rose to a record of more than 1.4 million barrels a day in the week ended Sept. 30.

by PeteB2 on Fri Oct 7th, 2005 at 12:44:40 PM EST
yep.  $3 bucks woke up quite a few folks.  

I lived through the 78-83 price spike as a college student struggling to cover commuting costs etc.  There is a price where people just stay home more.  

It's more pyschological than anything else for many.  When we get bored in the evening and head to town for ice cream, it costs us about 1/2 gallon of gas or $1.50 to $2 bucks. That's to go buy $8 bucks at the frozen yogurt place.  Does the last 50cts matter to us?? no, but I think about it more and often it tips the balance to staying home.  I've cut my driving back by probably 50% just by grouping errands better.  It's no real sacrifice when you are basically retired.  My wife's biz is booming so she just does what she has to and pays the piper.  Gas could go up by 5X and she'd still go.  But we'd buy a hybrid asap.

For others with moderat to low incomes and heavy commute costs, this is serious pain.  They have no choice but to trim.  Demand in the US is so stupidly high relative to everywhere else that trimming 3% is nothing though.  We could all find a way to trim 10% if we wanted to make a few minimal sacrifices.

by HiD on Fri Oct 7th, 2005 at 09:12:28 PM EST
[ Parent ]


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