EIA Inventory Data
In analyzing the last EIA report of the year it is
noteworthy that gasoline stocks really rose the last 5 weeks of the year. The
takeaway isn`t so much that gasoline inventories rose 23 million barrels the
last 5 weeks of the year, wow that is some build in inventories, but the fact
that Oil inventories barely budged at all during the process.
Seasonal issues regarding tax selling in order to move as
much oil through the system to avoid higher tax liabilities is primarily
responsible for the higher run rates of refineries, and thus the build in
gasoline inventories, but that should result in large drawdowns of oil as there
is a push and pull between products and the base commodity oil. Yet we end the
year slightly above the 370 million barrel mark in US oil inventories.
This is actually very bearish for oil because with these
gasoline builds refineries are not going to want to keep adding more gas to
storage as part of the reason refiners have done so much better with their
margins is by keeping low inventory levels in the products so you have what
appears to be a tight market.
Well, we no longer have a tight market in gasoline, so no
need to draw as much crude to produce the end product. We should start to
experience some rather substantial builds over the next couple of months in
crude oil as refiners request less base commodity, and lower their run rates.
The Rise in Domestic Production
This occurrence really points to the rise in US domestic
production as imports were fairly light during the last two months of the year,
and we normally have substantial drawdowns with refinery run rates in the 90s,
so something definitely worth paying attention to going forward into 2013.
Another point on imports and domestic production is that
there is a very noticeable trend on the charts; imports have trended down after
July, which is what one would expect after the summer driving season is coming
to an end, but domestic production starts accelerating at a sharp right angle
from July towards year-end.
So these are domestic
projects that are strongly trending regardless of summer driving season demand,
and unlike imports that are managed according to seasonal demand dynamics,
i.e., Saudi Arabia pumps more or less
depending upon the season, the domestic projects are just going full bore and
on a production path to increase performance each and every month if possible.
This is something new to the market because we no longer
have managed supply, just as Iraq is maximizing production right now because
they need the revenue, well these domestic projects are just revenue based
machines, and not being managed based upon supply and demand of the end
market. I will provide two charts to
illustrate this interesting phenomenon.
The Demand Picture
Another point to be made is what is happening with gasoline
demand, down in the wholesale sector 2.8 percent year-on-year. With GDP being better
than expected, and most believing that the economy is stronger than it was last
year, this could be related to better fuel efficient vehicles on average in the
US consumer fleet as the car sales were pretty good the last two years, and
maybe higher prices changing driving behaviors on a more permanent basis.
The demand chart for 2012 can be explained by the run-up and
actual summer driving season, with the inevitable falloff towards the end of
the year. However, many analysts have forecast that the US being a mature
country is going to trend down on a longer term basis from a demand standpoint,
with most of the growth coming from emerging markets, but the year over year
comparison is something worth paying attention to for 2013.
If we have a repeat deceleration
in demand at the end of 2013 year comparisons then further analysis will be
needed to identify potential additional reasons for slowing demand in an
economy that is seemingly strengthening with a stronger housing and employment
market.
Fundamentals versus Price
It would be great if Wall Street actually invested and
traded based upon the fundamentals, but the oil markets have long since
diverged from trading upon the fundamentals, especially in the short term, and are
more ripe with “managing” price swings either through sophisticated algorithms,
and “creative” fund flows than any notion of the fundamentals.
To put it non-euphemistically, basically the oil market has
been rigged for years, like most markets to some extent, and is about as
corrupt as it comes. All any bystander has to do is pull up a price ladder of
bids and asks, known as a trading Dom, and watch all the large fake orders and
other assorted order flow shenanigans used to manipulate price up and down the
chart each day.
However, over the long term, the markets cannot stray too
far from the fundamentals, for eventually the fundamentals take precedent over
the trading shenanigans, especially if there is a definable, sustained trend in
the fundamentals, and it appears that we are entering a new age where the world
is going to have a five year period of abundant supply.
A New Era: Growing Economy with Lower
Energy Prices
In fact, more supply than demand, even with a robust
economy, because part of the reason the world economy will be doing so well is
all the global enterprises out there producing oil. It’s a good business with
very high margins when compared to many other industries with the past decade
of higher prices.
Consequently, even if the US economy really takes off in 2013 as some have forecasted, don`t look for demand to overtake supply in the equation. The domestic oil renaissance means that we could have a booming economy, and still have more supply than we can use each day. Thus it is actually possible to have an era with a great economy, and even lower oil prices due to the domestic oil boom.
Further Reading - Cushing 50 Million, Boom & Bust Cycles, US Debt & Recession
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