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Thursday, July 05, 2007

Riddle Me TWIP

TWIP = This Week In Petroleum. A zippy weekly read, I can assure you.

If anyone can explain this seeming violation of the laws of supply and demand, please do.

Future prices on crude oil continue to rise, while in the US, at least, crude oil stocks are signficantly above their five year averages:

But gasoline prices are dropping nationwide, even though gasoline stocks dropped this week and are nearly 10% below (-9.8) last year's stock. Darned if I can make any sense out of this one!!!

Diesel is beginning to inch up.

I'm sure it has something to do with what's called the "Crack Spread".

The price of gas has been high relative to crude oil, as there's been (I believe) a shortage of refining capacity.
It's not the price gas relative to oil that confuses me. It's the movement of prices inverse to supply for both.

For gas, the answer might be that consumption has dropped enough to create a comfortable supply margin, even if stocks relative to last year have dropped so much.
ed in texas

Ok, bear in mind that previous high prices were driven by maintenence outages in great plains refineries that created a bottleneck on panhandle crude. They came back online last month.
Now think about that refinery in Kansas that's underwater, offline, and in about the same state as the Shell Baton Rouge facility after Katrina.
The userside supply tanks and lines are full. For now they are. In a month, prices in Chicago and therabouts are gonna climb.
At least, that's my guess.
Thanks Ed, it's much appreciated.
Hi, this is the primary author of TWIP. Thanks for the compliment on the writing of TWIP!

Crude oil prices are up, despite large stockpiles here in the US, because they are not so plentiful elsewhere. Crude oil prices are set in a global context and everyone is forecasting an increase in the demand for crude oil over the 2nd half of this year, which will require more oil from OPEC. Yet, OPEC has not yet shown an inclination to increase output, which would ultimately drive inventories lower. Thus, oil prices are trading on the expectation of supply and demand in the future, what some have termed "future fundamentals". Additionally, there are still some issues overseas that have the market nervous.

While gasoline prices are down, they are still high by US standards. After reaching a peak price right before Memorial Day, prices have dropped some as the high prices encouraged more supply and slowed the growth in demand. As a result, gasoline inventories have been able to build some, although they remain below the average range for this time of year. This is consistent with a declining price, yet one that is still high.

Doug MacIntyre
"If anyone can explain this seeming violation of the laws of supply and demand, please do."

You ASSUME that prices are determined by supply and demand when there is ample historic evidence that prices are set by oligarchic consensuses.
Thanks, Doug. I genuinely and sincerely appreciate it.
Much of the disconnect between supply and price is the result of speculators buying up oil contracts on the futures market. They think they see a high demand in the future, so they buy and hold oil off the market until prices rise high enough. It is a tricky business and they often get caught with oil they can't sell for as much as they paid. But there must be some profit in it or it wouldn't be so big a factor.

Also some speculators believe they are just one big Middle Eastern event away from a big payday. If the ME cooled down oilwould go back to $30 - $45 a barrel, maybe less.
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