One of the must-read items every week for the geekiest of energy geeks is the TWIP (This Week in Petroleum) report that arrives every Wednesday. The current (August 29, 2007) installment has some graphics and text that deserve attention far beyond our little clubhouse.
First, the main visual:
And now the text:
As the chart [above] indicates, not only is the absolute level of inventories low (see Figure 4 in the Weekly Petroleum Status Report [PDF file]), but in terms of days of supply, it is the lowest ever recorded (the days of supply data goes back to March 1991), reaching just 20 days. This is even fewer days than seen following the hurricanes in 2005. While the absolute level of total gasoline inventories has been slightly lower a few times in recent years, when the level of demand is taken into account, it has not been this low before. Of course, with gasoline demand set to fall significantly after Labor Day, the low level of inventories is not likely to cause a sharp spike in retail prices, but more likely will limit the usual seasonal decline seen after Labor Day, with the possibility remaining of an atypical slight increase over the next few weeks.
What this means is that while retail prices are not expected to jump sharply on a national average, they are also unlikely to fall dramatically over the next few weeks. Of course, this expectation is based on the assumption that there are no major hurricanes or other non-market events impacting petroleum infrastructure over the next few weeks. With no storms forming in the Atlantic as of this writing, that should be considered as another bit of good news for drivers.
Finally, the US gasoline stockpiles in absolute terms, from the same TWIP:
So, what to make of all this?
The US gasoline stockpile situation is unsettling, and obviously we could be in a world of hurt if there were a major disruption to our refining capabilities, like another hurricane that strayed into the “wrong” part of the US Gulf Cost. Look at the red line in the graph immediately above. While stockpiles normally drop at this time of year, they’re already below the five-year band (in blue), and in the last couple of weeks they’ve dropped faster than they have historically.
I’ve seen the question raised online (and in e-mail) about just how low stockpiles can go before the basic distribution system, which is dominated by pipelines, starts to break down. I won’t pretend to know the answer to that one, but it feels to me like a Very Important Issue we should be talking about.
In the top graph above, it’s hard not to notice that we’re already at a lower days of supply figure than we were after the hurricanes in 2005, which is even more attention-grabbing than saying we’re at the lowest point ever for this measure. Twenty days? That’s cutting it too close for comfort.
Right now, we need to keep dodging bullets. No more refinery outages, no hurricanes in inconvenient places, no demand spikes, no interruptions in the imports of finished gasoline. Speaking of imports, I would also point out that the only reason we avoided more than the spot shortages we saw in 2005 was a spike in imports of gasoline, much of it from Europe. I’ve seen analysts comment that Europe doesn’t have the spare gasoline to sell us right now, which puts and even finer point on the matter.
So keep your fingers crossed. The next couple of months could be decidedly interesting.
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August 30th, 2007 at 3:29 pm
The obvious question this raises is, why are stockpiles falling? The next sentence after your quote goes on, “The U.S. average retail price for regular gasoline dropped 3.6 cents last week to dip to 274.9 cents per gallon as of August 27, 2007, 9.6 cents lower than last year. All regions recorded price declines.” Why are prices falling if demand is up and supply is down? Why are distributors letting their stockpiles get so low without raising prices so they can resupply? This whole thing doesn’t make much sense to me.
August 30th, 2007 at 4:24 pm
Could it be gasoline stockpiles are at historic lows only because we now rely much more on gasoline imports than we did in the past?
August 30th, 2007 at 4:28 pm
That’s a hell of a good question. Let me take a wild guess at what’s going on…
Perhaps it’s tied to market speculation. NYMEX gasoline prices were pretty high and have been declining steadily for weeks. So, why were the futures markets seemingly so worried weeks ago but are now ignoring these stockpile numbers? I’m guessing that they were spooked by all those refinery outages, plus the projections for a busy hurricane season, and now they’ve concluded that we’ll manage to muddle through, barring anything unforeseen (like a hurricane), which currently isn’t on the radar (literally).
I know this sounds like a very forced explanation, but it’s the best I can come up with. I’ve been watching this for weeks and wondering why the gasoline price was sliding. The NYMEX price was $2.36/gallon on July 10th, and is $2.08 as I type this. I think it would be “reasonable” for it to be at least $2.50, all things considered.
There are times when I think the most perverse thing on the planet is market psychology.
August 30th, 2007 at 4:53 pm
EWJ: Good thought, but that doesn’t seem to be it. According to the current Annual Energy Review:
US imports of gasoline were 477,000 barrels/day in 2006, and over the 2000 to 2006 period, inclusive, averaged 478KB/d, if you throw out 2005 which was an outlier at 603KB/d because of the hurricane aftermath. (Table 5.3)
The US consumed 9,230KB/d of gasoline, including imports in 2006, making imports of finished gasoline only a smidge over 5% of consumption. (Diagram 2) To bring the days of supply up to 2006 levels would require another 15,000KB of stockpiles, as a rough estimate.
I’m not even sure that imported gasoline wouldn’t count toward stockpiles, as it has to be stored somewhere in the US between the port and your local gas station, even if only briefly.
I’ve quoted numbers for gasoline only, not diesel fuel, jet fuel, etc., since that was the relevant commodity.
September 1st, 2007 at 8:54 pm
I suppose generally some reasons why a retailer would let his stockpile of goods fall temporarily would be if he thinks the price he can sell for is going to fall soon, so he wants to sell more now; or if he thinks the price he can buy at from his suppliers is going to fall soon, so he wants to hold off on purchasing now. Either way it almost looks like a signal of lower prices, the opposite of what most analysts suggest. Puzzling.
September 3rd, 2007 at 10:20 am
Hal: That depends on why the stockpiles are dropping. With gasoline demand strong in the US and months of refinery issues, it seems at least possible, perhaps likely, that this drop in gasoline stockpiles is involuntary. I’m sure the companies involved could have paid much higher prices to acquire extra gasoline imports, so I’m talking about them following a business as usual model and not resorting to that step.