The initial disruption to oil output in Libya happened at a "fortuitous" time for European oil refiners as many were closed for maintenance.
"Now we're going into the summer driving season, those refineries which have returned to operation are about to ramp up their production."American refiners switched to summer blends about 1.5 to 2.0 months ago. American refiners are well past the switch to summer blends. American storage tanks are at their fullest in years.
Jones said the market was facing a possible shortfall of 1.8 million barrels per day for the remainder of June and 1.7 million for the next quarter.
Storage tanks used by oil producers at the crude-trading hub in Cushing, Oklahoma, held 38 million barrels as of June 17, 41 percent above the five-year average for this time of year, according to Energy Department figures. Stockpiles at Cushing reached 41.9 million barrels in April, 2011, the highest point since at least 2004, when the Energy Department began tracking the figures.The Europeans generally take their vacations in August, and their refiners are just beginning to switch to summer blends and getting ready for August driving and increased air traffic.
If any oil is released from American strategic petroleum reserves, it won't be going to American refineries; it will be going to European refineries.
If finally makes sense. It made no sense for the release of oil from the US strategic petroleum reserve if one simply looked at the American situation.
By the way, at the right price, this could also help provide American with a better balance of payments this quarter.
(Reminder: American oil -- particularly the Bakken is light oil, the kind the European refineries use and were getting from Libya -- particularly the Italian refineries. Saudi oil is heavy oil and not "wanted" by Europe.)
I would guess that the actual physical oil from the strategic reserve release won't go to Europe but via displacement such oil that the US would have imported will now go to Europe. As they say, oil is "fungible".
ReplyDeleteI sort of get the idea that the USA has upgraded their refineries for "cracking" far better than Europe. From Minneapolis, Minnesota I have seen a number of stories related to this. Asphalt tar is way up because of improved "cracking". A Cable show "Mega Movers" featured a million pound "cracker" delivered to our Kotch brothers refinery in Rosemount, which is way inland.
If President Obama timed the release to curb speculators in domestic crude it was a good move, abet a tactical one. That said, when crude oil got up to $140 then President Bush signed an executive order allowing coastal drilling and the price plummeted below $100.
Keep an eye of the spread between Texas light sweet crude and Brent light sweet crude.
You are absolutely correct: oil is fungible.
ReplyDeleteI knew that we wouldn't be actually sending oil to Europe; I was writing metaphorically, but I'm glad you pointed that out to make it clear.
But it really is a strange situation. The storage tanks are full at Cushing (in fact, Enbridge has been forced to move oil elsewhere, if I remember correctly) and yet we are going to release oil from our strategic petroleum reserve. It will be interesting to see if the administration reports how much oil is actually requested by "big oil."
I'm not convinced it was a good "tactical" move. If oil holds above $90 (as it has so far) that really doesn't amount to much of a move on the downside in the big scheme of things.
It simply pointed out to everyone how narrow the supply and demand situation is.
If the IEA is being honest, that the refineries in Europe were facing a shortage, it only points out how tight the situation will be a year from now when China is using even more oil.
In Minneapolis I saw unleaded regular for $3.45 on Saturday. Down a dime in a week and over a quarter from the high this year.
ReplyDeleteSame thing here in California, down to about $3.75. Even down to $3.65 in some areas.
ReplyDeleteBut certainly not due to the announcement that oil was being released from the reserves. Oil doesn't move through the system that quickly. In fact, I doubt any oil has been released from US reserve yet. The bureaucracy of applying for and releasing it would take a few days.
The price of oil was already headed down when the announcement was made, making this whole decision very confusing.
Until one realized it was the European refineries, particularly the Italian refineries that were running desperately short of light oil.