Monday Morning – All Eyes On Gasoline.

Oil Yawns Over Hostage Release As Gasoline Draw Down Rules The Week. Last week I wrote that we would see a slow decline in oil prices to the $62.50 in the wake of the Iran / Britain hostage "crisis". The market should be returning to a more data driven state now which probably means we trade slightly lower to sideways over the next week or two. Refiner utilization should start building towards the end of this month and with that the gasoline market should begin to loosen up, possibly yielding a $60 test for oil by month end.

No trades in the post this morning as I'll be watching gasoline prices closely before commiting further capital to puts. Interesting to see a couple of downgrades from Lehman amongst mini majors (HES) and (MUR) both of which are no doubt enjoying strong returns in their R but potentially not in their M segments.

Oil Inventory Review:

Gasoline Rules The Week After Larger Than Expected Withdrawal. Gasoline prices climbed another $0.07 to $2.12 - levels not seen since last July after a much larger than expected drawdown in stocks.

  • Expectation: down 350,000 vs Actual of 5 million barrel withdrawal (high demand, weak utilization, weak imports)
  • Demand Has Been Especially Strong This Year. Last year a demand response was seen when the national average started approaching $3. We'll see if that matters this year.


  • Imports Have Been Subdued As Higher European Prices Have Lured Tankers From U.S. Shores. Imports need to remain north of 1 mm bgpd if prices are to subside below $2 per gallon later this Spring.


  • Refinery Utilization Remains Depressed. Even in the wake of Katrina and Rita, which flooded numerous Gulf Coast facilities, refiners were able to rally utilization by mid-April 2006. There is no reason to think that current low levels (87%) will persist beyond the next two to three weeks.


So what's happend to Gasoline Stocks? The EIA presents you with the following chart. The slope of the descent is a bit steeper than the norm but stocks remain within the bounds of historic averages for this year after rising well above them less than 3 months ago.


A Slide In Stocks In Early Spring Is The Norm, Not An Anomaly.


Traditionally, gasoline stocks don't begin to start building for another 2 to 3 weeks. This year it will probably take a little longer.


Odds & Ends

Analyst Watch: (HES) to underweight at Lehamn, (BTU) to outperform at FBR with a $2 increase in target to $70. (PPP) from sell to hold, (MUR) from overweight to equalweight at Lehman, (CCJ) to hold at CIBC

CFTC Watch: The net natural gas position gained roughly 16,000 contracts last week bouncing off a record high net short position and supporting prices despite a larger than expected early season injection of 58 Bcf. Last week traders were eyeing one last cold snap which will likely result in a return to withdrawals this Thursday. I expect natural gas, which has been joined at the hip with oil for the last few weeks, to soften in the wake of this week's EIA report and to test the $7 level next week. After that, hurricane mania and La Nina stories (which by the way is not a sure thing at all at this point) are likely to provide firm support at $6.

32 Responses to “Monday Morning – All Eyes On Gasoline.”

  1. 1
    zman Says:

    Not for the feint of heart, adding to SCU down here at $0.80. The second covertible piece went off on Friday and I people are reacting to the $1.17 conversion price like they were unaware of it.

  2. 2
    zman Says:

    Gas Storage page updated:

    YoY storage deficit has fallen from 17% to just 7% in the last 3 weeks. This is the major reason behind my &4 then $6 natural gas targets. If gas makes it as far south as $6 I’ll be pretty surprised.

  3. 3
    zman Says:

    Gasoline reversed earlier declines and is at fresh new 2007 highs over $2.13 this morning despite weakness in crude.

    Not touching another refiner put until we see some change in momentum here.

  4. 4
    zman Says:

    Tankers continuing to outperform

    Adding RAIL calls this morning after the Berkshire buys stake in railroad companies. Should be a bit of a delayed reaction then leap here.

  5. 5
    zman Says:

    Re El D’s comment on the storage tab.

    El D – Pretty hilarious, no? There is no logic to this and that’s why I went more neutral a month or so ago saying downside is limited to probably $6. I still think we fall off with weather later this month but beyond that rising production and the second highest trough storage tally ever don’t seem to matter a whit.

  6. 6
    zman Says:

    Wow USO falling out of bed but gasoline is up another 2 cents. Should hurt everyone but the refiners. SU looking weaker all morning despite the group’s gains.

  7. 7
    sane Says:

    Ideas in gasoline demand spike

    I was thinking about gasoline demand and thought maybe people were taking more vacations over spring break time and that we might see some peak shaving during the summer months d/t $3 gasoline last summer.

    I was talking to a buddy of mine who works for a gas station / convience store company around here, and he was saying that they were topping off all of there tanks d/t the Iran thing a couple of weeks ago.

    Last idea is that people love paying $3/gallon. Probably the most true.


  8. 8
    El Diablo Says:

    Well, there is some logic to it, it’s called bubble logic…

  9. 9
    sane Says:

    Yeah I guess RBOB is the hot market now 😛


  10. 10
    zman Says:

    Noticed the spread between regular, mid and super has moved from $0.10 to $0.15. That extra dime will help the marketing side which has been hurting at some locales.

    When that bubble bursts it’s going to be a pretty fast fall. Probably more downgrades on the way in the refining sector although don’t think they’ll help until we see the utilization rise.

    Also, Sane, about 2 months ago I did some check with local gas stations and found they were getting 2 shipments / week not wanting to go long gasoline and only kept 10% in their tanks. Take that with what you’re saying and it creates a heck of a lot of secondary demand unrelated to acutal driving.

  11. 11
    El Diablo Says:

    The rationale and justifications ‘fed’ to the media for higher prices become more absurd every day. We must be running out of ‘greater fools’ soon…

  12. 12
    zman Says:

    El D – any more snafu you see today? Oil looking pretty weak but gaso still strong.

  13. 13
    sane Says:

    El D,

    As long a people keep falling for the rhetoric about high prices, the shenanigans will continue in the market. Also, demand growth is continuing to fuel the insanity.


  14. 14
    El Diablo Says:


    I hear you. Ironic thing is that Big Oil has pulled one over on the environmentalists, and used them to help fatten their wallets. The ‘fear’ of ‘peak oil’ causes consumers to disregard price signals (like plywood prices during hurricane season, gotta have it so price is irrelevant). Also helps President push his farmer-corn-subsidy-Ethanol legislation through congress, buying key swing votes for next republican candidate.

    All quite amusing to me. Scary part is that American public is so gullible.

  15. 15
    sane Says:

    Agreed EL D.

    Americans can fight back against big oil and big profits, just drive less. When they ratchet up prices d/t OPEC like extended refinery maintance or whine about refinery expansion the consumer should stand up. I am not saying quit driving, but say 10% less. That equates to about 910000 ~ 950000/bpd. That would send a deep freeze right through the oil/gasoline market. It will probably never happen but it is nice to think about. BTW most americans could probably cut back %10 with minimal impact on their lives.


  16. 16
    El Diablo Says:


    Heck, 5% would do it. In any commodity market, 5% surplus capacity leads to plummeting prices.

    Environmentalists are too focused on protesting Hummers instead of getting ‘the big picture’. People buy hybrids so they can drive more on same fuel consumption. Focus should be on ‘total BTUs consumed’, instead of ‘miles/gallon’. That includes heat for your home, and electricity consumed. Cutting 5% of that total is even easier.

  17. 17
    sane Says:

    True El D.

    I just kinda threw the %10 off the top of my head just doing a quick look around at peoples habits. I agree on the BTUs consumed.


  18. 18
    El Diablo Says:

    Z (and other faithful readers):

    I’ll let you in on a little secret, your tax dollars are hard at work in the ole’ EIA.

    All those SNAFUs are collected for you daily and posted at 5 pm:


    Even a nice little daily archive going back to pre-Katrina days. Plus, this serves as the portal for any ‘real’ energy-related snafus, ie, hurricane outages, etc.

    Don’t blame me for holding out on you… I stumbled upon this by searching for information.

  19. 19
    zman Says:

    Well I got myt $62.50 first target and then some. Gasoline tanked $0.03 as well.

    Meanwhile, refiners could care less.

  20. 20
    zman Says:

    Thanks El! They track so much information I’m not surpirsed.

    Iwas just trying to see if they have a handle on different types of demand for gasoline (end consumer, gas stations). So far no joy.

  21. 21
    El Diablo Says:

    I meant DOE.

    They comb all the gov’t filings, trade rags, and news wires and compile it daily.

    EIA probably doesn’t know that DOE does this! Government, beaurecracy, redundancy, its just taxpayers’ dollars….

  22. 22
    zman Says:

    Took TSO May $105 At $4.20.

  23. 23
    zman Says:

    …which should mean TSO makes $110 in next few minutes. :-0

  24. 24
    sane Says:

    Interesting article on CNN Money

    The gasoline demand debate


  25. 25
    zman Says:

    Thanks Sane, that goes into tomorrow’s post for sure!

    Imagine that, Fimat bullish. Says the numbers are legit, blames the demand on jobs growth and says no would in middle man territory would dream of fudging the numbers.

  26. 26
    Rob Says:

    XLE hit a 52 week high today, lookout below.

  27. 27
    sane Says:

    I saw that Fimat was quoted, and before I even read what they said, I knew what they said.

    I have read quite a few things that Tom Kloza has said over the past year, and he seems like a pretty straight shooter. I have never heard him talk manipulation. It was quite strange.


  28. 28
    zman Says:

    Hear ya Rob.

    Down YoY and sequential oil prices

    Down ToT but slight up nat gas prices

    XLE multiple expansion underway. The argument for expansion has been that the stocks were only discounting $40 oil and $5 gas and that now they’re just catching up.

    I have a problem with that thesis given the industry’s low to no production growth profile (in aggregate and in leadership) which means that just about everything depends on commodity prices…which are flagging when you look at the longer term charts.

    …but they can keep this up at least into the later portion of earings season.

  29. 29
    zman Says:

    Sane – re Kloza. I agree. I don’t talk that stuff b/c manipulation is akin to conspiracy theory which is akin to crazy oil bear wearing a bow tie and getting laughed at on air CNBC.

    I do charge CNBC with a huge bull bias but I think that’s pretty well accepted and they’re bullish on everything. The fact that they’re owned by GE who has a large oil service division doesn’t even enter into my thought process. ;->

  30. 30
    zman Says:

    Has anybody seen a theory of stock price gravity? For day’sw like today in energy, what start out up big end up big, the smaller stuff, that stayed closer to unchaged early on was dragged down with crude.

    Example: TSO up $2.6 at one point finishes up nearly $2 while while XOM, which never really escaped oil’s pull and was only up about $0.50 at it’s best closed down $.40 ish and near LOD.

  31. 31
    El Diablo Says:

    As I said last week, the 5mm barrel gasoline draw was suspicious. Fortunately, under-reporting storage is like a house of cards. When it crashes, you not only go broke, you’ll probably go to jail. Just ask the traders from Enron, Reliant, Dynegy, and Mirant that orchestrated the CA power and gas ‘shortage’. That was small potatoes compared to these markets.

    Another example of market exuberance/greed ignoring risk (of being a lifer’s ‘wife’ in San Quentin)

  32. 32
    Zman’s Energy Brain » Tuesday Morning – Don’t Sell Your Car Just Yet Says:

    […] Yesterday I gave a graphical tour of the US gasoline situation. While we wait on more data tomorrow lets take a quick look at OECD nation inventories. […]

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