Many refining companies are opening up plants formerly closed for maintenance.
A tightening oil supply in conjunction with a surplus in gasoline reserves is an indication that the slowing demand for oil and gasoline, a consequence of the global recession, is resulting in simply a shift in where the glut in American fossil fuel markets is being stored. Eight months ago, however, we were frantically searching the globe for places to tap for more oil; ANWR, the OCS, oil shale, tar sands, anywhere we could find it, no matter how difficult it was to extract. The prices in the commodities markets justified the exploration into new, more difficult areas of extraction. Today, it is a different story, the world cannot shut off the spigot and is running out of places to store the glut.
OPEC rushed on to the scene once global demand for oil began slowing down at the beginning of the recession, but for all of their efforts, they were unable to prevent oil prices from tumbling to historic lows. As oil prices climbed last summer to touch the $150 bbl level, analysts tried to outdo each other with their upward predictions. The higher oil prices climbed, the more money Americans paid at thepump in order to fill up their tanks. Today, the story is not so simply based upon demand; industry officials are having to factor into their analyses the glut of oil that has built up in America’s storehouses and in tankers sitting idly offshore waiting for the days of higher oil prices to return.
Cushing, Oklahoma is “a major hub in oil supply connecting the Gulf Coast suppliers with northern consumers. Cushing is famous as a price settlement point and has been cited as the most significant trading hub for crude oil in North America”. The facilities in Cushing hold roughly 5-10% of U.S. oil supply and are nearly at capacity today. This push-up against the upward limits in supply and storage capabilities of domestic facilities is what is causing oil to meet resistance trying to break through the < $50 bbl level; it is definitely what dropped prices into the $30 bbl range.
The problem concerning the backup of supply in Cushing began back in late 2008 when oil refiners began closing some of their facilities for maintenance. Trying to take advantage of a slowdown in demand for gasoline as a result of Americans driving less due to the recession and the onslaught of massive layoffs spanning virtually every industry, refiners shut their more energy intensive facilities. With less people driving to work, and ‘pleasure driving’ sinking off the charts, the demand for gasoline was below levels that made refining heavy crude profitable. The refining facilities that remained open were the ones that processed light sweet crude; this was done in order to boost the returns for refinery companies and to maintain their heavier crude facilities. Maintenance is an ongoing issue, and a slowdown in demand is a perfect time to schedule it in.
Recent reports on the domestic oil supply, however, are indicating that oil supply figures are tightening; meaning that the glut is diminishing, but only slightly. For the first time in two months, oil inventory figures dropped, indicating that either the OPEC drawdown is starting to work or that the supply is simply being shifted into gasoline production gearing up for a heavier summer driving season. While a drawdown in imports of OPEC oil has been going on for some time, the effects of it have not entered into domestic markets. The new development that may be affecting oil’s rise to $45+ bbl recently is the report that “gasoline inventories rose by 200,000 barrels last week, while distillate stocks, including heating oil and diesel, increased by 1.7 million barrels. Analysts had given an average forecast of a 600,000 barrel draw on gasoline and a 400,000-barrel decline in distillate stocks”. In order to deal with the oil glut in American markets, more refineries are opening back up and oil storage facilities may be pushing the surplus through the refining process in order to clear their shelves, so to speak. What they may end up causing is a glut in gasoline supply, essentially shifting the problem to another set of storage facilities.
Once the production spigot was turned on ‘high’ last summer, it became extremely difficult to shut off. Here we are nearly 8 months later with full oil tankers anchored in port and oil storage facilities nearly at capacity, all waiting for oil prices to rise so that they might dump their cheap oil onto a more profitable market. Even banks tried to get in on the act, buying oil and renting tanker space as a way to try to make up for some of their bad investments in the past.
Refiners are hoping to meet a recovering demand for gasoline, but the recession may put a crimp in their plans; although gasoline is cheap, Americans may not choose to drive as much this summer as they have in years past.
One of the first signs of an economic recovery will be a recovery in the oil markets. Less production of goods means less demand for oil; as the demand for oil rises, this may be the signal that manufacturing is gearing up for a recovery. Investors are looking for sign that will indicate a collective willingness to address some of the risk in today’s markets.
Regardless of the projections on gasoline demand increases, gasoline stockpiles rose recently, indicating that some of the oil glut is possibly being dumped on the gasoline market. Investors may have to wait for this news to flesh itself out in the coming weeks and analyze more thoroughly what is causing oil stockpiles to decrease.
While we wait and see if oil supplies continue to draw down, the renewable energy sector continues to struggle. Despite remarkable commitments from the federal government to spur investment in clean energy, the industry wallows in the recession. It has become virtually common knowledge that at $35 bbl, renewable energy in all of its forms is not able to compete. Fossil fuel energy is by far the cheapest to produce, but it is also the dirtiest. Oil prices around $90 bbl make a majority of renewable energy technologies competitive; oil prices around $150, like they were last summer, make renewable energy a viable alternative. Perhaps as the 1Q’09 comes to a close at the end of March, we will have seen the worst of this recession and then can begin our long climb out of it. Whether that starts happening in April or later into the summer, oil prices will lead the way.
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