Oil Inventories falling
It’s been two weeks since that befuddling 9 mb drop in US commercial crude oil stocks, and since then, stocks have fallen another 9 million (about 4.5 m both weeks since). Oil bounced off $122 up to $138, then back to $131, and now at around $136. One of the predictions of peak oil is that price becomes highly volatile at the time of peak, and we are seeing that now. But, more importantly I think, what I predicted might happen seems to be happening. Crude imports into the Gulf ports from Venezuela and Mexico really are tanking, and there doesn’t seem to be immediate relief in sight. As a result, we can expect inventories to continue to fall at a sharp rate. We really only have 30 million more barrels in stocks to lose before hitting MOL (minimum-operating-level). This is the level where losing more stocks begins to have an impact in the workings of the oil infrastructure - pipelines don’t work without a certain minimum level of constant throughput. Refineries shut down or greatly reduce their operations if their oil tanks get too low. Such things led to spot shortages last year in places like North and South Dakota. It could get worse this year.
One thing that confused me was the jump in refinery utilization while gas prices remained relatively low. I know the refiners aren’t making money on gas, so why would they work at almost 90%? I learned in the past week that the US exports diesel, which the rest of the world predominately uses (while the US mostly uses gasoline). That means the refiners are able to make a profit by making diesel and selling it abroad and as a by-product, gasoline is also produced for domestic consumption. I am glad for this piece of the puzzle because I didn’t understand what was going on, which could have meant my mental model was off. However, this fact (exporting diesel) clears things up in a way that supports my previous guesses as to what is going on. Of course, this is rather bad news economically.
So I expect to see more runups in the price of oil in the next few weeks. $180 was my target price (pulled out of my ass, but we’ll see). Saudi Arabia is calling for a meeting on June 22. That should be very interesting, and could change things tremendously. If they come out of that meeting blaming speculators for the price of oil, I expect a bloodbath to the upside. If they come out promising production increases, I expect some sell-off, but mostly flat as buyers wait to see if they deliver on their promises. Some of us don’t believe they can.
