WRITTEN THIS MORNING (OCT 24, 7AM)
This morning OPEC convened and arrived at a decision to cut 1.5 million barrels of oil per day. Many of you are likely asking what we can now expect and what will happen. Let me try to shed some light for you.
It will be an interesting day on the market, that is for sure. Traders will have to fight it out- some traders will likely view this as a sign that OPEC is deeply worried about a world recession and that cutting production is an “endorsement” by OPEC that demand has fallen significantly, along with many countries only major source of cash… oil. Unexpectedly, Venezuela was NOT the OPEC member seeking the biggest cut in production, as I would have expected with their attitude towards the U.S.
The cut is one of the largest cuts I’ve seen from OPEC who usually cuts under 1 million barrels/day. You can see the worry that these countries have as some simply can’t operate now with “normal” oil prices. I’m hoping the Saudi’s will not follow their quota and keep pumping oil. World inventories are ALREADY too low in my opinion, and this cut worries me enormously. Whenever the world decides to come out of recession, this cut COULD likely mean RECORD oil prices- but that will definitely depend on how long we have this economic slowdown.
Today, we have 311,380 million barrels of oil (excluding the SPR) in U.S. inventories. That compares with an all-time high of 391,907 million barrels on July 27, 1990, and a low of 263,666 million barrels on January 23, 2004. We’re still trying to recover from that low. Just this past January (2008), we had 282,841 million barrels in storage. We really need to have inventories at 350,000 million barrels but OPEC doesn’t want to keep pumping.
Demand of gasoline has fallen and stayed under 9.0mb/day, and I expect that EVEN WITH this announcement, it will take some time for oil to reverse its course.
NOTE: Wholesale prices today in GR are $2.46. We have a ways to drop yet.
With prices falling (and rightfully so) to the $3.60’s (suburbs) and $3.70’s (GR area) and much lower in other parts of the state, is a hike likely anytime soon? It could be… chances are really 50/50, but I personally filled up just in case so I wouldn’t get caught losing too much money if prices came down. If any hike occurred, it wouldn’t be more than $3.79 or so.
Nationally, there are still major refineries without power and that are closed in Texas and Louisiana. Refineries operated at a record low 66.7% of capacity last week, as reported by the Department of Energy in its Weekly Report.
We’re hurting folks, but not as bad as those dealing with REAL GASOLINE shortages in Georgia, Tennessee, areas of the Carolinas, and the upper South. They are encountering major supply issues as refiners are slow to pickup the pieces.
Nationally, I expect prices to rise up-to a dime more before things calm down. I think realistically, we won’t be back to normal until mid-Winter. Supplies of gasoline in storage are at a record ALL TIME LOW dating back to 1969. Folks, this is pretty unprecedented.
Other news, TheGasGame.com will be making a splash onto Washington, D.C. airwaves as Ed was called for a radio interview! Cool! We are also looking to add another major source of information (this is huge and I’m quite excited about it). The source may provide inside information to the oil/gasoline industry and will fuel my curiosity to learn more, which will ultimately benefit our audience here.
Be sure to stay tuned to the REFINERY STATUS page as well. It will be updated as necessary or as new information becomes available. It is quite accurate at this time.
The basic idea to make predictions is to develop an estimate for the retail price for which retailers are not making any profit. In our postings, this is sometimes called the “0-cent margin price” or the “Spike Line price”. As the retail price gets closer to this price, a reset of 15 cents or more becomes more likely.
To compute the price, we have to take into account an estimate for the wholesale price, a variety of taxes, and miscellaneous items (e.g., middlemen, freight, and storage fees). Tax rates are set by the Federal government and state governments, and the miscellaneous items stay relatively stable. So, the key number to focus on from day-to-day is the estimated wholesale price.
There are a number of ways to estimate the wholesale price. One approach is to combine the RBOB quote with this RBOB/CBOB comparison quote.
The formulas for the current calculations can be found on our Spike Line page.
— Ed Aboufadel
Edit: Speedway has just hiked to $3.95 in Michigan; while not totally shocking, this is something that might have been expected. The Gas Game gets quite difficult to predict at times like this!
Another disappointing report from the Dept. of Energy this week, we can look for gasoline to trade higher today.
Perhaps due to the Hurricane/Tropical Storms last week, the DOE reported refinery utilization at just 85.9%, with crude oil inventories falling 400,000 barrels (LOOP was closed [Louisiana Offshore Oil Platform] last week) which likely altered crude import numbers, but gasoline… OUCH! Gasoline inventories fell a massive 6.4 million barrels last week, putting us now in the lower part of the average range, and putting us almost exactly at the same amount of gasoline in inventories as this week in 2007.
In a month we’ve consumed 14.3 million barrels (600.6 million gallons) of gasoline more than were refined. Amazing! Look for that stat to perhaps spook traders as they see some bullish numbers coming in. I definitely expect gasoline to trade higher today, perhaps triggering a hike in the Grand Rapids area… more on that later today IF necessary.
Also, the SPR is STILL adding barrels to its massive storage?! Didn’t the Dept. of Energy state that with oil prices so high they were going to delay deliveries to the SPR in mid-to-late July? It hasn’t happened! This week the SPR sits at 707.2mb, last week 706.8mb and last year at 690.3mb. Just more empty promises from government to do something positive for the market.
Look for gasoline to pull oil higher as traders get some bullish news.
PS- Midwest PADD storage fell to 48mb this past week, look for the Chicago Premium to start hurting soon!
It’s been a while since I wrote here folks, but it seems prices have been “somewhat” steady around our region, and quite steady (what a surprise!!) in Grand Rapids.
If you read my previous post about the Summer Forecast, you’ll have a better idea where this post fits in the big picture.
Of course my writing was prompted by the Weekly DOE Report released today at 10:30am EDT.
Let me highlight some of the good news from that report for you that will help push prices (gasoline) lower:
- Refineries operated at 89.7% of capacity last week. This number is higher than previous weeks and is necessary to produce enough product for the Summer Driving Season
- Gasoline production and Distillate (Diesel) production rose compared to the last week, averaging 9.1 million barrels and 4.5 million barrels per day, respectively.
- Gasoline inventories rose by 2.9 million barrels last week, much higher than expected
- Distillate (Diesel) inventories rose by 2.3 million barrels last week, higher than expected
- Propane inventories increased by 2.3 million barrels last week, wow!
- Total inventories rose just 200,000 barrels last week, but most of that was due to a large drop (4.8mb) in oil inventories
- Total demand of petroleum products has averaged 20.4 million barrels per day, down 1.1% compared to last year.
- Gasoline demand as averaged 9.3 million barrels per day, down 1.4% compared to last year.
The only real downfall to this otherwise good report was the large draw-down in oil inventories (4.8 million barrels), but that’ll happen in Summer when refineries are trying hard.
Crude oil inventories are now over 40 million barrels below what they were a year ago (347.7mb compared to today’s 306.8mb) which definitely could use some improvement from OPEC.
The Midwest PADD’s storage rose last week from 48.6 million barrels to 49.3, which is good news, but could have been better. Perhaps our prices will fall a bit more than the rest of the nation.
Overall, a good report. Wholesale gasoline and diesel prices are really taking a beating in early morning trading after this great report came out. Gasoline at last check was down nearly 10-cents a gallon while Diesel was down nearly 8-cents per gallon. Crude was roughly $2 lower to $122.50.
We should see Grand Rapids prices slowly come down if the market holds negative. We could see as low as $3.85 in the next week, so don’t be too quick to fill up… PRICES WILL BE COMING DOWN (ugh, although we’re still talking just 15 cents south of $4… sad!) pending today’s closing numbers.
Seeing as how refiners were losing money for parts of this week refining oil into gasoline, utilization was low. It is rare, but refiners were losing some money last week as the cost of a barrel of oil was *more expensive* than the cost of their finished gasoline. They were losing cents on refining every gallon of gasoline.
Having said that, here are some numbers:
- Refinery utilization dropped to 82.2%- until the “crack spread” or earnings for each barrel of gasoline exceeds the cost of a barrel of crude, this will stay low. The only way that utilization will rise is if pump prices rise.
- Crude oil inventories remained unchanged from last week, even though much less crude was produced/imported than usual.
- Gasoline stockpiles fell 3.3 million barrels. This isn’t a surprise due to the issues I stated above about no profit from refining
- Midwest PADD storage fell to 56+ million barrels from 59+. This is a large drop and we may see any Chicago Discount begin to dry up.
This was a bad report, but local stations have already hiked to way over my previous target of 3.25-3.29. I believe we may see a rehike tomorrow to $3.45-$3.49, so keep an eye out between 9am-10am.
We’re back to usual here folks- pump prices will “march” higher to begin April!