CrudeIQ: Vol. 7

First, I apologize for the delay in the CrudeIQ newsletter getting sent out. I didn’t know when I started this that we would enter a period of an unprecedented number of unprecedented events in the oil industry. It’s taken me a minute to wrap my head around the situation, and I’ve finally come to the conclusion that nobody knows what’s actually going on or what is coming next.

However, today I’m going to share a high-level summary of why we’ve seen such a large jump in gasoline prices here in Utah over the past week.   

I’d love nothing more than to also give a forecast on where gasoline prices are headed, but right now the only forecast I feel comfortable giving is that prices are going to keep going UP.

I’m sorry to be the bearer of bad news.

The chart above shows us the gasoline inventory levels for the Rocky Mountain Region, or PADD 4 (Petroleum Administration for Defense District 4. The US is broken down into 5 of these districts/regions, mainly for reporting and analysis purposes).

If you follow the blue line across the graph, you’ll notice a VERY steep drop in the past week. Across the Rocky Mountain region we saw our inventories of gasoline be drawn down from 9 million barrels to less than 8 million barrels.

As the amount of gasoline available shrinks, gas stations bid higher and higher in the wholesale gas market to secure their next shipment of gasoline. As we discussed before, the price at the pump reflects how much the gas station expects to pay for their NEXT shipment of gas, and it does not reflect what they paid for the current shipment of gas they have in their tanks. Station managers are seeing regional inventory levels drop and are getting fearful of not being able to get future shipments, and that leads them to bid up the price they pay for the next shipment even more.

So, you’re probably wondering why our inventories are emptying out so quickly. Great question, I’m glad you asked!

Inventory levels change based on two factors: 1) How much gas in put into them over the week, and 2) how much was taken out and shipped to gas stations. For inventory levels to go down we need to see either a decrease in the amount put in, or an increase in the amount taken out. This past week it’s been the latter.

Utah’s five oil refineries, and all other refineries across the region, have continued to operate at near full capacity, which means the amount being put into our storage tanks each week has stayed the same. What has changed is the amount going out. The reason for the large withdrawals is the change in WHERE the gasoline is headed once it leaves the storage facilities.

When prices increase as much as they have, especially for the coastal states, gas stations in California, Arizona, Nevada, Washington, etc. find they can buy gasoline from the Rocky Mountain Region and transport it in for less than they can buy it from either their own refineries or importing it from other countries. And because we live in a capitalistic/free market society, the refiners here in Utah are free to sell it to the highest bidder, which isn’t always to someone here in state.

It’s not what we like to hear, but it’s what’s going on and the reason for the $0.30+ jump in gas prices this week. The powers of supply and demand continue to be undefeated.

As oil supply continues to be held up because of the war with Iran, the price of gasoline will only continue to rise. The quick solutions that were implemented in the beginning of the war (lifting sanctions on Iran and Russian oil, opening up strategic reserves, etc.) have played out and delayed the inevitable price increases as long as possible. Now comes the pain of higher energy prices.

The “expert” oil analysts have predictions that range from oil staying around $100/barrel to $250/barrel. We’re currently at $105/barrel today. However, we’ve NEVER seen this level of supply disruption before. Ever. So trying to forecast out the effects of this big of supply shock in today’s world is impossible to do with any degree of accuracy.

There does seem to be a consensus that even if the Strait of Hormuz opened up today to all shipping activities, it would take 6-12 months to get oil flowing anywhere near where it was before the war. Not only are ships not in the area anymore and would take time to sail back to the loading ports, but the infrastructure damage that has already been done will take months, and billions of dollars, to get back up and running again.

And that’s the best possible outcome if the war ended today without incurring any more damage to ports and oil infrastructure.

If you found this interesting, you probably know someone else who would enjoy it, too!

Please forward this to anyone who comes to mind and encourage them to subscribe!

-Mark Acor, [email protected]