http://www.bloomberg.com/apps/news?pid=20601072&sid=am4ICh0F9RFo.



http://www.reuters.com/article/idUSTRE6142V820100224

Well, maybe the tanker pilots took the week off after all....

Based on this and a higher dollar I don't understand why the price hasn't dropped to 60 or so, or maybe even lower.

Some weeks you are good, and some weeks you are lucky. This week I was within .7 on each of the three things I forecast, and would certainly have whipped up on the analysts, had their forecast been published, but it was more through the law of averages rather than brilliance.....

We know for sure that there were a few tanker pilots on Bourbon Street last week, because crude oil imports were up to 9.1 mbpd, and of course if you are a frequent follower of this thread you know that it has been a long time since it has been that high, I suppose you would have to go back to last fall sometime.

Also, ouir refinery manager friend is no longer staring out the window of that barbecue place in Orange because the refinery utilization went up to over 81 for the first time since December-ish, I think. We were wondering the other day if the system is not waking up a bit from its winter slumber and in fact that is exactly what happened. More unloading, more refinery activity, people are gearing up to start producing those blending components.

Demand: I think the 8.7 products supplied number is lower than it actually was for unleaded, and the storm had some influence on the numbers but OF2's table this week will show a decline in unleaded usage this week vs. last year. The depression in the trucking industry is also still continuing, and I think that a little of this demand is still residual from the bad weather....

So, what happened was: The refiners are cranking up, the imports are coming on shore to supply it, the demand is still not what you would call exciting, there is plenty of oil around as are there finished products,

But is that a recipe for higher prices? I am with Bas on this one. There is a lot of crude oil around, demand is not that great....I don't know.

What I do know is that the API report was directionally and magnitudally different than this report. So what now moves the market? Your guess is as good as mine.

Here is a graph for you this morning, It's about the refinery utilization during the period between now and June 1, which is the time all of the refiners used to scale up.

The average increase in refinery utilization in that time frame was about 5%....

As you can see, they used to more or less linearly increase utilization at this time of year but the last 2 years, this has not been the case. In both of these cases there was a little peak at about this time and then they walked away for awhile, I guess hoping that the market would pick up or something....I suppose kinda like the ground hog, but a month later, they turn on the units for awhile and then just shut them off for six weeks....

So it is my guess that they will do exactly this in 2010 as well. My timing might be off by a week or two, but the way things are at the moment I don't see them being in a big hurry to get this stuff started up.

Pricing: Well the market is up around 80 today, just under I guess, despite the unloading of a lot of oil last week. My crude oil import forecast is that they will unload about 8.7 this week, a bit of a regression toward the mean, because there may have been an extra tanker last week that we do not see right now. I will stick by the "funny stuff happens around the contract expiry" theory, and also with the "higher pricing influences the decision to unload oil" and take continued observations....

Demand: I checked the demand seasonality for both unleaded and distillates, and found that in the last couple of years, demand was flat at the end of February like it is.



So here's your forecast: About even in the products and also in crude oil. That was a lot of work to say "about even" but that is what it is.

Nice! We closed out the week of 2/19 at 81.17%, for ref, a high for this year. It looks like these numbers come in pairs, two consecutive years have roughly similar profiles, and we are entering a new regime of idled machinery.

In contrast to all that Operable Capacity is at an all-time high reached a month ago. All that talk of closures from Valero etc gets swept under the rug with this metric; I caught this piece which mentions Marathon expanding its Garryville LA facility for $3.2 billion: Refiners facing tough times .





I should update my input/capacity graph, it's about a year out of date. Wonder what the profile of the gap looks like now, it was pretty gentle sloped before but may be looking more like a '<'. Or a grinning croc.

Yeah, Valero is our normal whipping boy when we talk about stuff like this. We know that they need about $8 per barrel refining margin to break anywhere near even and if we are talking about 2 or under for the most efficient refining system in the world, that certainly is not too good....

If you take Valero's market capitalization (with the stock price at 17 which is what it is today) and divide by the refining capacity (2.8 mbpd) you end up with about $3500 per BPD capacity....

As you will remember we were doing a lot of calculations at one point that suggested that the Saudis for awhile were considering the addition of some refining capability at a greenfield site for roughly $20,000 per BPD capacity.

So, in the grand scheme of things, relative to that era, if you really needed finished products, you would buy Valero, sell off the pipeline company, sell or shut down the retail operations, and it would still be a fraction of what you would have to pay if you were building that stuff from the ground up.

Now in the case of Valero, to be sure you are talking about a really inefficient system, and so this might be discounted some for the fact that you are going to have to rebuild a lot of this equipment to make it work properly.....

But, if you were the Chinese, and had the choice of either building a drefinery or buying Valero on the open market, just to get the refining capacity, would you do it?... Assuming, of course, you needed the refined products...

Maybe not. In that case, maybe the equipment is too big of a mess....plus most of their system is in the Atlantic basin... but there might be a price at which you are tempted....

Looks like Katrina+peak oil/demand were a one-two punch they weren't ready for. All that newfangled operable capacity will just build up the fire sale price if things don't turn around soon.

Thinking about China and Valero...I'd try and enter into a long-term contract with them, quietly ship the stuff west without anyone noticing. But that doesn't seem to be part of the Grand Plan at the moment; we export more product to Gibraltar. Perhaps they expect the refiners on their own to start arbitraging in that direction when things heat up again. But that would mean higher shipping prices cutting into the cut in the first place, plus (?) ostensibly better markets at home. China has never been much of a hot spot for US exports, they were #13 for February, behind the Bahamas.

China moving into the refining business simply for the $$$$ is another matter, of course. We do export more to Japan and Singapore, too.

Yeah, years from now Katrina and Rita will be looked upon as the turning point in a lot of different areas.....

The present state of the refining business is nothing less than a catastrophe. As we have said many times, these operations are now run by bankers and bean counters who would much rather invest their money in something else at this moment. The period between 1985 and 1990 (just to the left of your graph) is illustrative: Low operating levels led to a reduction in overall capacity (the yellow line) and then when demand picked up again, the system was busting at the seams in 1998 when everyone was trying to drive a Ford Explorer.

It's entirely predictable what is going to happen now. Enough of this capacity is going to be shut down to bring the utilization back up to reasonable levels.

And then demand will be crushed to the new lower level.

It makes sense to put Refining Capacity where the oil is
and/or it's final destination. Houston, NO qualifies for
neither. As Venezuela wonders why it needs Curazaos
Refinery.

Just to add its not just refineries its all upstream operations from Oil tankers to storage to pipelines to gasoline stations.

It does not matter if its "peak demand" or "peak oil" the result is the same massive overcapacity in all sectors. If its peak oil then only extraction of existing production remains profitable all other sectors become unprofitable.

This includes new field development and exploration simply because vertically integrated companies net lower profits and others that perhaps only do production become uncertain about their future. Regardless of the price of oil your simply not going to expand rapidly into a market thats fundamentally using less oil. Profitability of existing oil producers is not enough.
And of course the lions share of these profits are going to NOC's and thence to their governments so almost all the profit is exiting the industry. A NOC has little incentive to maximize production under these conditions.

Certainly you can claim that peak demand was the problem however the devastation from the resulting overcapacity basically ensures it was also peak oil its almost semantics. This is and industry that would has been hit hard enough that recovery is years if not decades away. Oil prices are high enough now that further increases are certain to dampen future demand thus only attrition will serve to balance the industry. The fact that discoveries significantly lag production mean that at a minimum very aggressive investment in new production is required to maintain or expand oil supply.

This is not forthcoming given the situation in the industry therefore its peak oil. Even if the industry right sizes in say a decade and returned to profitability the years of depletion pretty much ensure production will not reach new highs.

But its important to understand that this devastation of the oil industry is the result primarily of absolute capacity changes which if oil is expensive the signature of peak oil itself not peak demand. Thus we are probably facing not only absolute intrinsic geologic decline but additional issues because of the follow on effect of over capacity on the industry.

And last but not least attrition from this overcapacity collapse is not spread evenly its a point collapse. A refinery here a gasoline station there a oil tanker sent to the scrap yard or a pipeline shutdown. All of these changes make the system less and less resilient to changes in demand. More and more often delays and problems in the supply chain will result in shortages at the consumer side simply as a result of capacity reductions alone. Where you had three gas stations you have one if this one has supply problems you have no gasoline. Someone needs to buy a load of ol at spot but no tanker is available as its mothballed and its crew scattered. And of course obviously maintenance drops dramatically and equipment through the entire industry fails more often and is repaired slower if at all. Your assured that a industry losing money with massive overcapacity will become intrinsically more inefficient and unreliable. The resulting shortages may lead to price spikes but because they will be seen to be the result of above ground issues no attempt will be made to invest based on these prices as they will be seen as temporary indeed any excess cashflow and then some is far more likely to leave the business.

The temptation to effectively embezzle cash flow and "strip" a business till its bankrupt will be huge esp amongst the smaller private operators. They will just siphon off cash flow and let debts pile up till the company is bankrupt. Of course this will make financing even harder to get for the entire industry. This credit tightening leads more companies towards stripping cash and not paying debts sending even more business over the edge as more account receivables go unpaid.
Perhaps you even see companies under bid on projects to get the cash and not pay their bills pocketing the cash flow and undercutting someone trying to legitimately stay in business. Low balling a few finaly project before you go down would be normal. And of course often your forced to close before you complete the project leaving your customer holding the bag and probably straining them. A vicious cycle of sh#%t.

I'm actually amazed things have not fallen apart faster I though Valero would be dead by now.

And of course all of this on top of whats probably a real geologic decline.

, according to the median of responses




http://www.businessweek.com/news/2010-03-02/u-s-crude-oil-supplies-rose-last-week-api-report-shows.html


http://www.bloomberg.com/apps/news?pid=20601104&sid=a4_ws5B.6kAA

Well, the analysts very nearly whipped up on me, but I do not feel too bad about it.

My 1.4 million barrel unleaded deviation was due to being .1 off in production and .1 off in imports, times 7 days, so everything unfolded pretty much the way we figured.

In distillates, my demand estimate was off by .2 or something.....

and in crude oil, the increase in crude oil imports has continued, perhaps in response to the higher pricing the last couple of weeks, per our working theory at the moment.. ..My refinery utilization number was pretty close and my little model that computes the products and the crude oil utilization was within .1 mbpd....so the only place I was really off was in imports....

So, it will be interesting to see what happens. Here is a scenario for you: The market sees a big inventory increase, everybody dumps crude oil, the prices go down, and our pilot friend goes back to Captain Jack's next week.....

What do you think?

Just checking some EIA data on asphalt (not weekly, so slightly off topic) and noticed as price increased the refinery yield decreased -- strange behavior -- maybe due to different grades of oil?

Asphalt prices:

January February March April May June July August Sept October Nov December
2000 150.00 163.57 173.93 188.93 188.93 189.64 189.64 189.64 188.93 188.93 186.79 186.79
2001 183.57 175.00 174.62 170.00 167.31 163.08 156.15 149.62 147.31 148.46 146.54 145.38
2002 143.46 138.85 141.92 151.54 166.92 175.38 177.69 178.46 178.46 178.85 178.85 178.46
2003 178.46 193.08 201.92 201.92 199.62 187.69 181.92 175.38 177.69 178.85 178.08 178.08
2004 178.08 178.08 178.08 175.38 176.15 187.31 187.92 192.92 194.17 197.50 197.08 192.92
2005 189.58 188.75 188.33 189.58 189.58 190.83 194.58 199.17 227.08 235.42 237.08 232.08
2006 239.17 245.42 260.00 278.75 310.00 360.83 377.31 390.00 391.15 380.38 354.23 331.54
2007 323.85 322.00 316.62 313.15 305.62 301.92 302.69 302.69 302.54 297.92 292.15 294.85
2008 306.54 326.15 345.00 363.62 401.54 491.15 604.62 721.15 742.31 684.23 616.54 503.85
2009 455.83 440.00 392.31 383.85 362.27 354.09 391.82 399.09 397.27 379.55 384.09 425.00
2010 445.45 490.91 499.55

If the US isn't burning crude, the economy is not recovering.

This quote looks to have been picked up across the nation:

I think I have figured it out. Coker capacity expanded the last 3 years, so even with heavy oil imports increasing, there is more yield in diesel fuel and less in asphalt. The next step in this analysis of asphalt supply is to determine at what price is asphalt more economical to produce than diesel...

"Small Fry." "Column XX" are just one year moving averages. The products are arranged left to right/top to bottom, keep that in mind to aid in readability. Petroleum coke catalyst is third from the top, though, as they are sorted by Dec '09 volume and use of asphalt/road oil was at its seasonal trough.

Asphalt/Road Oil have gone down not only from the recession but from the widespread installation of cokers, which can use more of the heavy residue in refining. I only extended this series back to '05 to include products whose series began in '04, to slap the MAs on them. There have always been asphalt/road oil imports, too, operating in a 20-60kb/d band; there was an unusual spike in '07 for some reason, industry reacting to the decline in refinery output perhaps.

Gogh - the EIA's U.S. Downstream Charge Capacity of Operable Petroleum Refineries data will show the ratios of various types of kit. About 600 kb/d of coking equipment was installed over the 00's, more than enough to cut out heavier streams in favor of much more profitable light and middles.

Looks like oil prices are decoupling from This Week In Propaganda.

So far its looking increasingly like attempts to import gasoline and distillates are faltering sending us right to third base having to import crude directly. Still a bit to early to tell I'll need a few more weeks but the really weak import surge for produces is not a good sign at all. I did not expect it to falter this early. I think we have a good chance of a renewed surge with stronger gasoline imports over the next several weeks. So I'm still waiting a bit to see if this happens. Perhaps it goes sideways a bit who knows. In any case the real action happens after gasoline imports have clearly fallen off. Thats not yet.

Are you still hanging on to the tin foil hat paper barrel theory?

Yeah just not sure how to do the accounting any more. Its become pretty obfuscated these days. Best guess is we are bumping around somewhere near the lower bound. The only measurement left to try and guess is propane inventories.

If you recall one of the other factors I'm looking for is for refinery utilization to start ticking up thats finally starting to come about. I don't think we are at MOL or anything just near or just below the five year range. As long as they can stay above MOL then they can publish any number they wish. Obviously right now I'm more focused on gasoline imports but I think they are more important in the big picture. Obviously for a price we can always import oil however is this is actually competing with countries that also export gasoline and distillates to us you can see it becomes a problem fast.

Regardless if I'm right one has to imagine that at some point the US will be forced to come clean on its real situation.
The longer we act like we are swimming in oil and prices continue to increase the harder it will be when the truth comes out. A while back I posted a fairly reasonable price project. What ever the price is as we claim to be above the five year range it will be double when we finally admit to say the middle of the five year range and triple if we go to the bottom.

So if the truth is right now the bottom of the five year range:

Current claims = 80
2X or we reduce to middle range = 160
3X or we admit bottom = 240 bbl

So basically the market is saying that it does not believe the US claims and if they are false then we will get whacked hard
if they are as low as I think they are. Obviously the market seems to be increasingly acting as if it simply does not believe the US. We shall see. I'd honestly rather see the US back down and tell the truth forcing OPEC to act or show they cannot I think in the end prices would actually be lower than continuing to try and game the system.

Yeah, this makes sense based on what we know about the long-term decline in the quality of the feedstocks. DantesPeak used to have a chart about the average API number of crude oil feedstocks over time, I have not seen it in a long time but I am confident that the overall trend is continuing.....

So the system is adapting to make as much as they can with the low-end hydrocarbon fraction of the feedstock. The industry I came from actually uses this low end stuff as a feedstock for another product, and I am sure they have a lot of upward pricing pressure since there is less and less of this nasty old stuff around.....

Good post.




In the last three years, unleaded demand has increased by an average of .33 mbpd between the last week in February and the first week in March, I am seeing that the slightly better weather last week got a few more people on the roads.

I am always amazed at the effect that just a little more sunlight will have on heating oil demand... I think distillate demand will be down by .05 mbpd this week compared to last. Distillate products supplied have dropped by .6 mbpd since 2007, which is a depression-level contraction in the trucking industry.....

The recession will not be over until the big wheels are turning.

Crude oil imports have been over 9 for the last couple of weeks, probably in response to a bit of extra refining activity but as we said last week the last 2 years the refinery utilization has been lower at the end of March than it was at the beginning.... I am still looking for a little decline, maybe 80.5% instead of over 81 like it has been.

Last edited by pup55 on Tue Mar 09, 2010 7:21 am, edited 1 time in total.

http://www.marketwatch.com/story/oil-futures-crude-down-in-asia-on-stronger-dollar-demand-worries-2010-03-09