Energy Musings

Crude oil (West Texas Intermediate) is up some 50% in the last 3 months, click on chart to enlarge, courtesy of StockCharts.com, and you can follow that up-to-date here.


Mike Fitzpatrick at MF Global Energy wrote yesterday:

With each passing day we are beginning to feel more and more like the Emperor in his new clothes, but we must continue to warn that danger lurks. Since the turn of the year market lows about the only positive that we can agree on is that economic contraction seems to have slowed, but there has yet to be any discernable sign of solid economic growth. Previous recoveries may have gained strength very quickly, usually from US consumers penchant for profligate spending, and the availability of easy credit. These elements are missing this time around. Savings rates have soared as consumers snapped their wallets shut. While it is probably a good thing that credit is utilized more responsibly, putting consumers on a mostly cash diet means that demand will return very slowly.

Today he writes:

The solidity of the current rally's strength must be called intro question after yesterday's late sell-off in RBOB, the particular star performer, of late. The seasonal increase in gasoline production has not materialized to the degree of prior years because of historically poor margins. As product moves along the distribution chain towards pumps, refiners' stockpiles will be the first to register; so yesterday's large draw is hardly a surprise.
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In view of the fact that current gains in oil prices far surpass the 12% advance last year when prices were closing in on $100, certainly points out that this rally is an expression of hope, rather than a reflection of reality.

BNP Paribas commented the US energy statistics of yesterday as follows:

Product stocks: stronger draws in gasoline but an in line increase in distillates: Another week and another very depressing reading on US product demand which, on an average four-week basis, fell 7.5% against last year. US gasoline stocks draw more than expected as refinery deliveries jump, outpacing a recovery in imports on the week. Conventional gasoline stocks fell 2.8 mb while blending components were down 2 mb. The increase in deliveries (a proxy for demand) does not hide a 1.2% contraction on the year and needs to be set within the seasonal context. It can be seen as part increased deliveries to gas stations ahead of the Memorial day weekend and the start of the summer driving season (for logistical reasons), part exports of the remainder of winter grade material (no longer suitable for commercial distribution) and also higher blending as refinery crude runs are cut back. In the end, retail sales of gasoline were down 2.3% m/m in April, building on the 3.2% m/m fall in March while prices at the pump creep progressively higher – the average price nationwide for a gallon of gasoline is $2.3 (about $1.50 lower than last year but up from average of $1.96 during April). Distillates stocks rise 0.7 mb with builds in heating oil but mostly diesel. The US business inventory to sales ratio is still high given the magnitude of the recession, suggesting more cutbacks in industrial output – this would imply weaker demand for freight and as a result, sustained weakness for diesel demand. US distillate demand is still down by double digits against last year (-12%).

Click for larger charts with US energy demand indications, courtesy of BNP Paribas.
FT Alphaville provides some more insights into efficient markets ... The coming oil-equity disconnect ... and "bullish case for gasoline". Strong action based on anticipation ...