Energy Beat

Oil inventory data was released yesterday, and continues to point to tight supplies. On the basis of days of supply in stock, the long-term downtrend remains unbroken. While oil bears point to high storage capacity utilization, our response is that building storage tanks is far easier than developing new supplies or refining capacity.
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5 Comments on “Energy Beat”

  1. Actually, days supply of inventory would only be relevant if there is a supply shock or there was no more supply coming to market. This is evidenced in the continual decline of $10.00 in the past few weeks where your “indicator” has been calling for an increase during that time. World-wide demand is impervious to our supply. Our supply is there to allow the system to work. This supply is often misconstrued to mean something about our own ability to supply oursleves. In fact, this supply could be nothing more than oil in a pipeline on its way to a refinery. Our current “supply” of oil is quite high by hisotrical standards. However, it is meaningless if the Chinese are gobbling up as much oil as they can get any time a barrel hits the market. Figure out a way to determine world supply and demand, and then you’ll have an indicator that will show the true price of oil.

  2. Trent

    It’s true that the price of oil is set globally, and any picture based on our own demand and inventory levels is simply a proxy. If (a big if) the relationship between our supply and stocks is relatively consistent as a percentage of the global levels then it will work, otherwise there will be times that it falls apart.

    There are two other points, though, that remain relevant. First, as I said many of the oil bears are pointing to tight storage capacity as a reason for an imminent decline. Storage capacity is even less relevant than supply as an indicator, as it is easier to create more storage than more supply. And second, from the standpoint of oil’s impact on the US economy (consumer slowdown due to pinch of higher gas prices) lower days supply in the US is a valid indicator of whether the throughput for the refineries can go smoothly.

  3. Yeah, outside of the short term I don’t see either argument, sorry. I checked the chart of days supply back to ‘81 (the easiest I could get from the EIA) and plotted it against crude prices. You may see the result at http://www.bignose.org/blog/index.php?/archives/55-Crude-stocks-vs-prices.html
    The data certainly don’t speak. Do you see a relationship between inventories and prices? All I see is a slow improvement of the ability of refiners to hold lower inventories, up ’til some time last year when that stopped. Maybe they started capturing the convenience yield the market offered.

    My argument for select energy shorts has nothing to do with crude stocks, but with housing, consumption and US demand. For that matter, residential housing has a greater correlation with real crude than inventories. Granted, 0 sets the bar very low.

    As I mention in my note, who doesn’t love fuels long-term? The long term could have started in 1982, though. Until you know why 2006 is different (China? Iran? talk to us) you don’t impress.

  4. Rick--LPG and Natural Gas Trader

    The important number is swing capacity. All OPEC members, except Saudi, are producing all out, and despite high prices, the market is absorbing it. The swing capacity is arguably 1.5 million bbls per day, and this has never been produced on a sustained basis. This number was around 5 million bbls per day in the 90’s. Storage use at the moment is encouraged by the strip’s cantango. Moreover, hoarding is encouraged by various geopolitical factors, which may or may not be abating. The above chart tells me that infrastructure has not been keeping up pace with demand growth. SPR storage is presumably not included in the numbers, but is only a short term bridge in the event of a disruption. My point: the above chart reflects under investment, and is bullish for the commodity.

  5. Trent

    Thanks everyone for the lively debate this has fostered. It is great to have such well-reasoned arguments for both sides of the issue. Keep ‘em coming!

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