It’s true… Exxon, Shell and every other major integrated company are totally addicted to crack. Really. You see, if you want to know what’s really going to happen on the Tuesday (API) and Wednesday (EIA) crude storage numbers, look at the so-called “crack spread” between crude oil and distillates.
Whenever it happens, as it has this week, that gasoline futures fall in value and crude oil prices start to rise, you can expect that crude oil inventories in the current market are going to spike.
Lo and behold, and yea verily, yet another prognostication by your friendly Wolf Camp blogger comes to pass. How am I, so unwise in the ways of the market, able to come up with this rather simple correlation? It comes not from my intellectual prowess or gift with numbers… not even from an ability to make pretty charts or use big words!
Rather, the concept comes from a rudimentary understanding of how refiners work. The refineries have, in large part, actually be islands of calm in the stormy ocean of petroleum volatility here lately. That is because the price of distillates (like gasoline, for example) have not fallen quite as quickly as the underlying commodity price (crude oil). The expanding gap between these two price points allowed for refiners to make a little extra profit in this market (the “crack spread”), even though that was swallowed up by the losses being taken on the exploration and production (upstream) side of things. Manufacturing of distillates is made through a process called “cracking” the oil… You now know almost as much about the process as I do. You’re welcome.
Unfortunately, however, the refiners are VERY price sensitive to changes in this state of affairs. Why, you ask? Because, unlike crude oil, distillates cannot be stored for very long… they must be sold very shortly after they are produced. Refiners, therefore, make forward bets on immediate demand for their products every few days!
But, look at what happened last week… Oil storage supplies dropped (good news!), but distillates rose precipitously (booo!). This means that the refiners made a bad bet on the volume of needed distilled petroleum products, and drew down more crude to manufacture too much of the stuff. We can see the effect of that this week… Gasoline futures, for example, are in the toilet this week. What is also means is that there is (a) hangover inventory that absolutely must be sold this week (bad for gas prices) while (b) there is an incentive for refiners to take delivery of even less crude than usual, both because of the inventory overhang and because of the apparent weakness in demand (both are bad for oil inventory figures).
Meanwhile, crude prices are shooting through the roof this week! So, I should just stop typing, right?
Unfortunately, as I noted above, the API has already reported that the inventories for crude oil are up around 2 million barrels again this week. I think the rise in prices is just the influence of speculators trying to make some marginal dollars based on the idea that we’ll raise the export ban on WTI. As I have argued before, I think that lifting the ban is a short-term “solution” to an intractable problem of oversupply… lifting the ban also should have been done sooner if it was going to be done at all. Now I feel that the only people who will make money on exporting are the people who trade in oil futures… Like you!!!