Same day, November 12. Two different reports. Two different views on oil.
First, the U.S. Energy Information Administration: There’s a glut of oil.
Domestic crude inventories rose 1.8 million barrels to 338 million barrels in the week ending on November 6. That was way above the 600,000 barrel increase oil traders had expected according to a Reuters survey. In addition the report showed that U.S. oil refineries are running at just 80% of capacity.
No wonder that December oil futures fell by about 3% to $77 a barrel.
 Second, the International Energy Agency: There’s resurgence in oil demand.
 Oil demand has started to grow again after falling for a year and a half. Oil consumption is, in fact, exceeding forecasts and is on track to show a year-to-year growth in demand for the fourth quarter of 2009. That would be the first quarter to show year-to-year demand growth since the second quarter of 2008.
 It’s actually fairly easy to reconcile these two reports with their seemingly contradictory reads on the oil market.
 The U.S. Energy Information Administration reports on oil supply and demand now and focuses on the situation in the United States.
 The International Energy Agency is looking ahead to oil supply and demand in the next few months and reports on the global market.
 The big difference in the two reports boils down to Asia. Asian economies, especially China, are leading the world out of this economic downturn. The U.S. recovery has been slower to materialize. So Asian oil demand is picking up even as U.S. demand remains relatively stagnant.
 The big demand surprise, the International Energy Agency said in its report, is the speed with which demand for oil is increasing in the world’s developing economies, especially in China.
 Projecting that increase in demand into the future, the International Energy Agency, raised its forecast for oil demand in 2009 to an average of 84.8 million barrels a day. That’s an increase of 210,000 barrels a day from last month’s forecast. But it is still a big drop from the 85-86 million barrels a day of 2008.
 The agency now projects, however, that in 2010 demand will climb sharply to 86.2 million barrels a day. And that would put the world back where it was before the global economic slowdown of 2008.
 Of course, the oil market responded to the U.S. Energy Information Administration figures because they are about demand and supply now—and not some distant future like 2010.
 To me that suggests that it’s time to start looking at oil stocks again. If shares prices are taking a dip because of short-term oversupply in the United State, but the longer-term forecast is for rising demand, it might be time to buy.
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I’ll take a look next week at some ways to tell what oil stocks look most promising.
In your article on the long and short of oil, you were planning to take a look at some ways to tell what oil stocks look most promising. Are you still planning to do so?
Refiners are basically middlemen. They buy crude and make refined products that they sell for a few pennies per gallon (on a good day). They really only make money (say $0.10 per gallon) when there are shortages of refined products or close to it. In other words, they need very high utilization of refining capacity in their market. VLO mothballed their Aruba refinery recently – obviously not good sign for them. Don’t forget that ethanol has taken a bite too. It replaces gasoline and our government has been subsidizing it. Not easy to compete with that. If you really have to own a refiner find one who is opening / expanding capacity in Asia. Really IMO, you want to be in the business of getting crude out of the ground (called production) for a few $ per barrel and selling it for $50 or $70 or what ever the markets gives. That’s why the Middle East is so wealthy. So stick with the major integrated oils with play in Iraq, etc – everyone should have a few shares of a major in the vault. That’s why it’s called black gold. And buy best of breed.
The other aspect aside from timeframe that’s interesting about the difference between the US EIA and the International Energy Agency (IEA) comments is the report this week in the Guardian (UK) that a couple of former senior staff from the International Energy Agency claim the US EIA has consistently pressured the IEA to provide more optimistic medium/long term forecasts for oil supply than is warranted by the data. The claim is that they fear “triggering panic buying.” If true, this would give more weight to the possibility you mention that demand and price pressure could hit the recovery in the next year, or by 2011 as the IEA’s head economist warned in August.
mp3106, absolutely. HIgher prices would put a damper on economic growth which would reduce demand which would lower prices.
At least in an ideal world. The wild card in that rational market scenario is that fuel prices are heavily subsidized in some of the markets showing fastest growth in demand: China, Iran, India, Indonesia, etc. all have subsidies that keep fuel at below market prices. Not at all clear to me how to figure that into the mix.
francolargo, I think what scary investors away is the low capacity utilitization rate–about 80% now. It’s hard to make money in the refining biz at that level. Look at the recennt earnings reports from th likes of Valero. Not only were earnings down (a loss of 39 cents this quarter versus a profit of $1.24 a share in 3Q08) but they were unpredictably bad. Wall Street had expected a loss of 26 cents and Valero delivered a loss of 39 cents. Nobody much believes the projections for 2010 right now.
Jim – Have you seen any projections on the real reduction in demand in the US resulting from people buying hybrids and parking the old SUV? I imagine even ‘cash for clunkers’ had some effect. I would guess that some commuters who put lots of miles on the old guzzlers are now spending less on gasoline. It’s another reason IMHO to stay away from US refiners, expect for trading bounces.
Hearty greetings Jim. In your review, I would be curious about your take on a pre-downturn darling, FTO. Currently priced at 1.2 X book and projected EPS growth for 2010 up in the stratosphere, what is keeping FTO and other independent refiners from rising with the current rally? Fear of prices choking a recovery?
If there projections are correct that would put a slowdown to our recovery in the works. I do not think the consumer could handle a large increase in fuel prices with out cutting back even more on expenditures. This would also coincide with the danger of a down side in the market in 2010 as you wrote about.