Oil Today
The recession in America has dramatically cut demand for crude oil, and inventories are piling up. The lighter the oil it is, the less processing is needed at a refinery and the costs are lower. Recessions usually bring cheap oil and gasoline. But not now. Crude oil, the lifeblood of the global economy, costs $61.67, even as the world struggles through the worst recession since World War II.
U.S. crude oil inventories are at their highest levels in almost two decades, and demand has fallen to a 10-year low, but crude oil prices had climbed more than 70 percent since mid-January to a six-month high of $62.04 on Wednesday. Light, sweet crudes are preferred by refiners because of their relatively high yields of high-value products such as gasoline, diesel fuel, heating oil, and jet fuel.
The brief respite from last summer’s record-high crude prices, which aggravated the global economic slump, will soon give way to another oil-price spike that may be more painful than the last one. The reason is the decline of such super fields as the North Sea, Alaska’s North Slope, Mexico’s Cantrell Field and Saudi Arabia’s Ghawar Field – largest in the world – along with the extraordinary cost of producing crude from the few remaining newer crude sources.
Light, sweet crude for June delivery settled 60 cents, or 1%, higher at $58.62 a barrel on the New York Mercantile Exchange. June Brent crude on the ICE Futures exchange settled 65 cents, or 1.1%, lower at $56.69 a barrel. Futures proved unable to resist gains in U.S. equities, which have set the course for the oil market for much of 2009. Stocks have risen along with investors’ hopes for a quick end to the global economic downturn, which should bring with it a rebound in oil demand.
For the first five weeks of the year, unleaded gas supplied has increased at 2.0% compared to the same period last year. Domestic crude oil production has been declining at about 2% per year, for the last however many years, except because of the hurricanes, the 2005 numbers were a little worse. There is an inventory buffer working in U.S.’s favor. Opec/Saudi is apparently determined to cut back on their production. This means that the inventory of crude oil will start to drain toward the end of March, and will seriously drain throughout May-July. The amount of actual drainage can be computed once we know exactly what our imports are running for this period, but keep in mind that a half million barrel per day drain is a 3.5 million barrel per week drain, so we could be down under 300 million barrels after about 10 weeks at this rate of drainage.
The refineries in the latter half of 2008 were paying top dollar for oil, and then producing gasoline in a low-demand economy. Now, refineries are producing less, driving up prices in even this low-demand economy, while stockpiling discount oil. The fear of lower demand pushes prices higher. The refineries have slashed production just to avoid taking losses on gasoline no one will buy.