Wed Oct 4th, 2006 at 07:40:20 AM EST
It's been about a month since the last of these. At that time I laid out a case for how we could get into the $50's on crude oil. And like the stopped clock, I got one right.
Where are we overall now?
Front month WTI has dropped $20/bbl from it's summer peak and $10 from just a month ago. Gasoline has truly crashed from August 2nd's $2.33/gallon ($98/bbl) on Sept HU contract bbls to $1.45/gallon for Nov HU ($61/bbl). The new RB contract is roughly $1.50/gal ($63/bbl) also Nov.
Heating oil (HO) has fallen from $2.13/gal ($89.5/bbl) on August 2nd to $1.66/gal ($69.75/bbl) today.
(Sept and Nov contracts)
Crude (CL) has dropped from $76 on Aug 2nd (Sept contract) to $58.7 yesterday for the Nov contract. March 07 is $63 so the market remains more concerned about 6 months from now than tomorrow (deep contango).
Why? Fundamentals are dominating instead of news/politics.
Distillate stocks are enormous in the US. 151 million bbls in primary storage (refiners + tank farms) Secondary = distributors, tertiary = retailers IIRC. True heating oil (>500 ppm sulfur which can no longer be used for road diesel) is 63 million bbls which is 20% over the average of the last 5 years. UGLY.
Gasoline stocks are also huge for this time of year. 213 MMB and rising is a very flush level.
Crude stocks at 325 MMB are also flush.
So why are refiners running so hard? It's still profitable to do so.
Check those product margins or cracks.
RB/CL is $63-58.7 = $4.3/bbl. This would have been normal to good for this time of year a decade ago.
HO/CL is $69.75-58.7 = $11/bbl -- huge money.
a 3/2/1 crack (3 crude vs 2 gas and 1 heat) which is more typical of what a USGC refiner might sell to lock his margin gives $6.5/bbl. That's a nice margin though the USGC refiners may get less as they are about $1/bbl away from the NY market (pipeline tariff). No way you'd expect run cuts and there aren't any to speak of. Runs remain at about 92% of capacity down only 2% from the summer peak. And this time of year is when maintenance is done.
Where are we going?
In about 3 hrs the EIA will put out new US stock data. That will be a trigger. If heat and gasoline continue to pile up, we're headed lower, especially on heating oil. Moreso as weak el nino weather usually means normal to mild temps with more rain for the US northeast which is heating oil's market. That crack would have been $3-4/bbl 10 years ago and lower with this much oil in tanks.
OPEC is already starting to rumble. Their basket is at $55 according to their website. The high population, broke nations of Venz, Iran and Nigeria are already talking production cuts. Saudi is mum so far. The rest either export so little as to be irrelevant (Indo) or defer to Saudi (Kuwait, UAE, Qatar). It usually takes a month or so of pain before Saudi reacts and I'm not sure they consider $55 on the basket pain--they've been looking to move the market lower. The next meeting is Dec 14. It's unlikely OPEC will do squat before then unless the complex collapses to say $50 WTI.
My guess? We'll chop around a bit here as the shorts take profits then have another leg lower particularly if heating oil stocks continue to build rapidly. It's too early in the year for weather to pull up prices, but also a bit too early for the speculators to capitulate completely. But if heat drops vs crude, the refiner's margin drops enough to trigger run cuts putting pressure on crude which takes down the entire complex.
All bets off when/if saber rattling of Bush v Iran begins again. Though I doubt he has the balls to do that running up to an election with an electorate burned out on elective war unless wagging-the-dog will distract the fundies from the latest wag-the-willie scandal.
All data from nymex.com http://www.nymex.com
or the US EIA