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:
- 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.
- 1.4 MMBD of crude production down in the USGC.
- Hedge funds holding length leaving the trade short and nervous
- 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.
- 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).
- 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.