Are refineries giving us the runaround? Are refiners hiding and not running? As soon as the shock wore off from the much more than expected 4.7 million barrel build in crude oil supply. Questions were put to me about the dramatic drop in refinery runs. Are the evil oil companies back at it again? Are they out to increase gas prices and print more money in times of economic hard ship? Why did refineries operate at only 81.6 percent of their operable capacity? Why did the production of gasoline fall even as demand was improving? What...are they trying to make a profit? The nerve of them! Are they trying to manipulate the price and just put more hardship on the average American?
Well let me assure you the refiners are not trying to harm the average American though they are trying to make a profit. Profits have been exceedingly hard for them to make. Refiners have gone through a very rough time and they were hurt by the financial crisis like everybody else. In fact as oil soared to record highs last year, refiner's margins dwindled. The price of oil kept going up while the demand for their product kept going down. Just recently, the gas crack - the amount refiners make to turn crude into gasoline - went negative which means that refiners were selling gasoline at a loss to fulfill some previous contracts. So instead of writing new contracts, many refiners decided to just shut down and do maintenance. There was no incentive to keep producing a product that hardly anyone was buying. What better time to fix your refinery than at a time when you are losing money.
Of course, if you do that when demand recovers, it will drive prices higher. Low gas prices that are still about a dollar lower now than they were a year ago inspired Americans to start getting back into the car. The Department of Energy reported that gasoline demand recovered to an average 8.8 million barrels, which was actually higher than last year. This is the first time in recent memory that the demand for a period actually exceeded the year before. Gas supply on the other hand fell by 2.1 million barrels, which put supply 6.1 percent below where they were a year ago. This confluence of factors has caused a surge in the gas crack spread where refiners went from making no money to the possibility of making big money! That is a good thing because that's the market's way of telling the refiners to get back to work. It is time to build up gasoline supplies so finish maintenance and get back cracking!
And the sooner the better, because our crude storage will start overflowing. It probably is already. With the refinery runs down near historic lows that lack of demand sent crude supply to a 16 year high. Oil stocks on hand are at the highest level since July of 2007, yet according to David Bird of Dow Jones News wires the year over year surplus in volume and percentage terms is the highest since July 27,1990. Cushing, Oklahoma is the delivery point for the world benchmark and supplies hit record highs. Now that the refiners have incentive, runs should rise, crude supplies should start to fall a bit and gas prices should start coming down again. Of course all bets are off if demand starts to fall.
With the Senate and the House coming together on stimulus bill, oil now will price that in. Yet the front end in oil will be weighed in by heavy supply. If you want to see a bottom in oil, I will tell you what we need. We need a washout! A big washout! The oil market needs to take an enema. We need to clear the decks and wash it out. We need to get prices low enough to start working off this supply. It seems that gas prices and rising cracks could help but a move into the twenties would go a long way to help this market find a bottom. We are still selling rallies and playing the swings. The next leg down for oil should be coming so get ready!
Natural gas report today: The street is looking for a 164 withdrawal. The gas market has been weak due to lack of demand. The Energy Information Agency said that they expect total natural gas consumption to decline by 1.3 percent in 2009 and then increase by 0.6 percent in 2010. The Reason for the drop in demand is that the expectation of limited weather-driven consumption growth in the residential and commercial sectors in 2009 is outweighed by the implications of continued economic weakness in the industrial and electric power sectors. The EIA expects consumption in the industrial and electric power sectors is expected to decline by 5.1 and 1.0 percent, respectively, in 2009. Consumption growth in 2010 remains largely dependent upon the timing and pace of economic recovery.
What is the best way to play a market recovery? If you are not sure, you can find out by watching me every day on the Fox Business Network! Also you can call me at (800) 935-6487 or email me at pflynn@alaron.com.
Whopper crude move and we've been short for the entire slide down! We've been short for months!
We're short March crude from approximately 4354 on what is a quadruple rollover! Lower stop to 4850!
We're short March heating oil from approximately 14000 - stop 14600
Sell March RBOB at 13300 - stop 13900
Sell March natural gas at 500 - stop 540
Phil Flynn is vice president of Alaron Trading and a Fox Business Network contributor. He can be reached at (800) 935-6487 or pflynn@alaron.com.
