[GHung]

The price of oil has finally started to obey the law. What law is that? The Law of Supply and Demand. Thanks to the US fracking boom that has done this (see chart) to US production, the supply of oil worldwide has outstripped demand since 2012. So why haven’t prices fallen before this summer? And are falling oil prices now a good thing? Or not?

While US production was exploding, other countries had level or declining production. Meanwhile consumption was falling in developed nations, but the developing world more than made up for that. Worldwide consumption has been steadily increasing since 2009. However, because of the US fracking boom, with the exception of 2011 supply has exceeded demand. Prices should have been declining since 2012, right?


[snip]

The oil price experience is a perfect illustration of what happens when central banks promote over speculation in commodities and commodity production. As the lifeblood of both industrial production and transportation, and as a money substitute, oil is the most important commodity in the world. A bubble economy built on the back of oil price speculation and production is placed at enormous risk when the price of the underlying good collapses. A boom built on virtually free and unlimited financing becomes a ticking time bomb when the value of the collateral collapses. The only policy solution offered is extend, pretend, and pray. How many times that will work, and for how long is anyone’s guess.

We got an object lesson from the collapse of the housing bubble. Clearly central bankers did not learn the lesson. They are about to get taught again. No doubt the mass of middle class workers and consumers will again become collateral damage as central bankers seek first and foremost to preserve their constituents, the banks and bankers who feed at the central bank trough.

Read it all here: http://davidstockmanscontracorner.com/w ... -disaster/

[BobInget]

the facts are... there is no one simple answer.
traders have chosen to ignore virtually all geopolitical events. after all we have been deep into 'the big muddy' for so long everyone not directly effected are bored.
so far this 'fracking revolution' as managed slow oil imports by that million barrels
which for some reason is supposedly producing a 'glut'.
simply put, we are importing a million fewer bpd.
the saudis permit the fiction to stand. not wishing to be accused of using the 'oil weapon' against iran. to hell with collateral damage to other fellow opec members and sworn enemy russia.

traders make little in stable markets. major fortunes are being made in volatile
markets, not boring ones. i assure you those on the losing end last month dream not of more pussy but revenge this month or next year.

it's preposterous to think of oil going down 40 bucks because china's RATE of grown slips to seven percent.(in spite of oil imports growing 15%)

Lazy reporting is also to blame. these days highly payed, skilled, shills
can steer PR reports like go-carts. in the age of google, few even bother to check facts. toke on brothers.

if you doubt what I'm saying, look into how long it took to convince folks the planet
is getting hotter.. see, you or your crazy uncle still doesn't believe it.
once evidence is too strong to deny, just deny we humans are anything but observers. or better yet, hang the messenger.

blaming banks actually might be valid but so are a score of other reasons.

don't forget; when elephants fight, grass gets trampled.

[BobInget]

Fadel Gheit warns of a revolution in Saudi Arabia: “I wouldn’t send my worst enemy there."
http://blogs.wsj.com/riskandcompliance/ ... compliance

Although most analysts say Saudi Arabia has sufficient reserve funds to weather a few years of low prices, some believe the loss of revenue combined with simmering discontent could cause the country to slide fast. The resulting risks are just too great to do business there, said Fadel Gheit, a senior vice president of energy research at Oppenheimer & Co. “If there isn’t behavioral modification, they are going to have another Syria–another revolution,” Mr. Gheit said. “I wouldn’t send my worst enemy there. Stay out of the Middle East. There are much better opportunities elsewhere.”

[ROCKMAN]

Let’s look at the supply/demand dynamic from another angle. And remember in the background we have to keep in mind the time lags involved. For instance companies were paying big lease prices for Eagle Ford Shale years before production even showed the first signs of an uptick. The same is true for the economies faced with increasing energy costs: they don’t start contracting at the first small increase in costs. As was just said: it’s complex dynamic with lots of complimentary and destructive feedback loops. So given the time lags we probably won’t have a clear TOTAL picture of what’s happening today until the end of 2015.

But let me jumped ahead to the big take away IMHO down below in case this piece is too long to read:

In September 2006 gasoline was $2.62/gal and WTI was $73/bbl. And American consumers were burning 60 million gal/day of gasoline.

In November 2014 gasoline was $2.80/gal and WTI was $72.36/bbl. And American consumers were burning 21 million gal/day of gasoline. Essentially the same price for gasoline and oil but today we are burning only 1/3 of the gasoline today. Difficult to believe these numbers but they are from the EIA. I’ll dig around and try to confirm from other sources.

So at this point the conversation is somewhat hypothetical. But suppose the drop in oil prices was directly related to the anticipation of the OIL BUYERS, the refiners, that their customer base would be reducing consumption because, for a number of reason, they could not justify maintaining expenditures at the recent price level. If the refiners are forecasting lower future prices for their products they have to reduce what they pay for oil, otherwise they’ll be losing money on every bbl they crack.

Though there have been short term ups and downs the volume of gasoline consumption has steadily declined from the summer of 2006 till today. Though it wasn’t a huge change, we’ve seen a slight increase in consumption in the latest stat but well within the range of normal variations over the last 8 years.

So instead of looking at the gallons consumed it might be more informative to look at $’s spent for gasoline. A simple concept: to what degree has demand/consumption affected the price refiners could charge for motor fuel? Which would also limit what they could pay for oil. Of course the alteration in consumer spending habits won’t change very quickly but compared to the years it took for US oil production to increase significantly the consumer can react much fast when it comes to curtailing spending . Which requires the refines of adjust much faster than drillers and producers…right? In theory that isn’t true especially two cut their production 50%. The crude they’ve already contracted to sell would just be taken from their storage system.

And back to the theoretical premise: if by Dec 2015 we see the same (or perhaps slightly higher) gasoline consumption we might conclude that demand destruction due to high prices and was the prime factor in the decrease in oil prices. IOW it wasn’t due to increased production levels alone: decreased demand would have put downward pressure on oil prices even if we not had the production surge. The oil sellers had no choice in lowering oil prices: if the refiners can’t sell their products at some acceptable profit margin they aren’t going to buy oil. But not just a function of the price. There's a world of difference between refining 200 million bbls of oil with a $15 crack spread and refining 50 million bbls of oil with the same profit margin: refining is a volume game before all else. In 2011 when the price was $3.58/gal we burned $140 million of gasoline per day. And with essentially the same price in 2013 we spent 36% less on gasoline. So one might argue that the US oil production increase kept gasoline prices from rising but at the same time consumption decreased. More US oil production AND decreased demand even at the same price: both have contributed to lower oil prices. So here’s the view in $’s spent on gasoline instead of gallons or miles driven:

2003 – $102 million/day with $1.60/gal
2004 - $111 million/day with $1.90/gal
2005 - $138 million/day with $2.31/gal
2006 – $157 million/day with $2.62/gal
2007 – $164 million/day with $2.84/gal
2008 - $182 million/day with $3.30/gal
2009 - $120 million/day with $2.41/gal
2010 - $127 million/day with$2.84/gal
2011 - $140 million/day with 3.58/gal
2012 - $109 million/day with $3.68/gal
2013 - $89 million/day with $3.58/gal

So from 2003 thru 2008 US consumers increased the amount they spent on gasoline 78% as the price of gasoline increased 106%. And then spending decreased from 2009 thru 2013 by 51% as price increased 49%. So over 5 years prices increase significantly but consumers spend significantly MORE for motor fuel. And then over the next 4 years prices increase significantly and consumers spend significantly LESS for motor fuel.

So what the hell happened in 2008 that caused consumers to decrease what they spent driving? Oh...yeah…a recession. And of course the refiners had to reduce their price for gasoline which also meant they had to reduce how much the paid for oil. But then we had recovery from 2009 to 2011 as the consumers had more to spend on driving…so we were told. And refiners, being the greedy bastards they are, increased the price of their gasoline which also allowed them to pay more for the oil they bought. But what the hell happened in 2012 when consumers started spending a lot less for driving: in just 2 years spending fell 36%.

Obviously we didn’t start heading into another recession: most of the politicians and economists swear things are getting better. For instance we have much higher employment now so there should be more folks driving to work and thus buying more gasoline. It can’t be because more folks are taking more mass transit: those numbers are up a bit but not significant enough to account for the drop. New cars during that period have improved the MPG a bit but the MPG of the total fleet on the road has improved just a fraction of 1%.

Well if you’re a refiner you might spend long hours trying to figure out while consumers are suddenly spending less on you product. But that isn’t your big concern. What troubles you is that income from selling your gasoline DECREASED from $51.1 BILLION per year to $32.5 BILLION per year…a 36% drop in that one product line by the end of 2013. And what does it look like today: from the EIA consumers were buying 42.0 million gal/day in Sept 2011 ($150 million/day) and 20.8 million gal/day Sept 2014 ($72 million/day). We decreased how much we spent on gasoline by more than 50% in just 3 years. And just about 3 months later we’re only spending $57 million/day for gasoline.

Look at the EIA chart: http://www.eia.gov/dnav/pet/hist/LeafHa ... 600001&f=m

Monthly US gasoline sales have been consistently dropping from 62 million gals/day since August 2006. And in August 2006 WTI Cushing was $73/bbl and gasoline was $2.62/gal. And in November 28, 2014 the price was $72.36/bbl and gasoline was $2.80/gal. The price of oil and gasoline are essentially the same today as it was in 2006. And yet demand, how much we are willing to pay at the current price, has decreased from $60 million/day to $21 million/day. IOW we are willing to pay the same price per gallon as we were 8 years ago but can only afford to buy 1/3 as much. Again, I was shocked at these numbers and will try to verify. But all my numbers came from the EIA.

Seems like it’s easy to explain why oil prices are where they are today: the refiners can only pay as much for oil as consumers are willing/able to pay for those refined products. The refiners don’t care what they pay for a bbl of oil: what they care about is how much profit they can make by refining a bbl of oil. And that’s determined solely by what they pay for the oil and what the price they sell their products. And refiners don’t get to decide what they sell gasoline for…the consumers do. Just as the KSA et al don’t decide what price they sell their oil for…the refiners do.

IOW: what’s old is new again.

[Synapsid]

ROCKMAN,

Thanks for this.

[Lore]

Well done Rockman!

[Cid_Yama]

That was truly a fine analysis.

Could part of it be that real wages have not risen in 40 years among the working class? That because of that, they were forced to make changes in their lifestyle that consumes far less oil?

When lifestyles are changed, they don't revert back to the old lifestyle.

When I was a young man, everyone drove everywhere. Long distances to beaches, on vacations. Just to see the USA in their Chevrolet.

Since then, among the working classes, disposable income has dried up. They are struggling just to keep a roof over their head and shoes on their children's feet.

You see, when most of the nation's wealth goes to the wealthy, it doesn't get spent.

Whereas, when it goes to the working class, nearly every penny does.

When the neocons decided to convert our working class into third world laborers and divert the wealth to the top, they shut down the consuming.

When they shipped manufacturing to other countries, those wages were spent in those other countries.

Seems the economists they were (are still) listening to, couldn't find their ass with both hands and two hunting dogs.

[ROCKMAN]

CID - "Could part of it be that real wages have not risen in 40 years among the working class? That because of that, they were forced to make changes in their lifestyle that consumes far less oil?" Probably in part. But I think I've been fooled by just looking at the consumption volume and not appreciating the cost factor. I use gasoline as a surrogate because the data is available and for the US should be very reliable. I really was hocked to see how the amount we were spending for gasoline varied in the last 10 years or so. It seems obvious that the main reason the US consumers was able to pay a relatively high price per gallon was because they severely cut the number of gallons they were buying. But eventually there was a limit to how low gasoline consumption could go with out hurting the economy. I'm generally not big fan of the tipping point concept but perhaps that's what was reached: without strong GLOBAL growth the economies in general could not pay the higher oil prices for the minimum consumption they required. If OPEC, and especially the KSA, had the same read it was critical to not let the world slip into another recession as it did in the 80's. A demand destroying recession that reduced oil prices to half of their current low price.

How's that for a theory you've haven't heard elsewhere: the KSA et al aren't going to cut production because they want oil to stay in the $60 - $70 per bbl range. Why? Because they don't want it to fall to $20-$30 per bbl. The oil producers needed to keep the junkies hooked: an overdose kills the junkie and loses a buyer for the pusher. That crack don't smoke itself, ya know. LOL.

[shallow sand]

Wow. Wasn't aware of the large decrease in gasoline sales. Where is all the excess gasoline going? Exports?

[ROCKMAN]

shallow - I need to research some but when folks toss out US oil consumption they don't net the number: I keep reading that the US exports products made from 3 million bopd. That's 42 BILLION GALLONS of oil equivalent per year. Of course, not all of it is gasoline/diesel but I suspect it makes up the largest chunk by far. And given perhaps that our exports began increasing about the same time domestic consumption decreased it would not have been apparent by just looking at what's tossed out as "domestic consumption" of oil which was really oil imports...including the 1 BILLION bbls of oil we import yearly now, refine and then exports the products.

[Tanada]

Wow that drop for 2013 really surprised me! My suspicion is much like the 1979 deal Americans have decided prices are going to be above $3.00 forever and bought more fuel efficient cars/SUV's. It doesn't matter if the total number of SUV's is the same if the newer models get 20% better fuel economy than the old ones it is a structural change in demand that lasts at least a decade. I personally know people who chose to get the I-4 engine option in new car purchases when a V-6 was available, in 2005 that wouldn't even have occurred to them. Now Ford has the aluminum body F-150 on the market, much lighter than the F-150 of 2004, so it too burns less fuel doing the same type of driving over the life of the truck.

[GoghGoner]

When the EIA puts out US gasoline demand stats, it usually uses US Product Supplied as a proxy not Refiner sales volume. I believe that US gasoline sales were down just under 9% between 2005 and 2013 and it can be explained by a drop in VMT. We have had some efficiency gains but most of the drop is due to folks having less money. Why the Refiner sales volume dropped so much is beyond me but I suspect a structural change in the way gasoline is being sold and I doubt that represents actual gasoline consumed.

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=mttupus1&f=m

[Loki]

When the EIA puts out US gasoline demand stats, it usually uses US Product Supplied as a proxy not Refiner sales volume. I believe that US gasoline sales were down just under 9% between 2005 and 2013 and it can be explained by a drop in VMT. We have had some efficiency gains but most of the drop is due to folks having less money. Why the Refiner sales volume dropped so much is beyond me but I suspect a structural change in the way gasoline is being sold and I doubt that represents actual gasoline consumed.

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=mttupus1&f=m

I was just going to post this. The drop from 60 to 21 mil gals/day isn't what US consumers are using, it's just retail sales of refineries. So ExxonMobil et al.'s refineries are no longer retailing as much of their product.

There has been a drop in US consumption of gasoline, but not by two-thirds:

In 2013, about 134.51 billion gallons1 (or 3.20 billion barrels) of gasoline were consumed2 in the United States, a daily average of about 368.51 million gallons (or 8.77 million barrels). This was about 6% less than the record high of about 142.35 billion gallons (or 3.39 billion barrels) consumed in 2007.

http://www.eia.gov/tools/faqs/faq.cfm?id=23&t=10

Their chart is here: U.S. Product Supplied of Finished Motor Gasoline (Thousand Barrels)

Europe has seen more dramatic declines in gasoline consumption. Can't post the chart, but Indexmundi has one here. Only goes to 2010, but shows a decline of 24% since the peak in 1992.

Both Germany and the UK have seen a decline of 37% since their peak in 1993, though I suspect diesel has made up for a chunk of this.

[ROCKMAN]

Thanks guys. Those numbers did seem very strange. But here's the problem...from your link: "EIA uses Product Supplied to approximately represent consumption of petroleum products. It measures the disappearance of these products from primary sources, such as refineries, natural gas processing plants, blending plants, pipelines, and bulk terminals." But if these commodities "disappear" from the sources it doesn't mean they were sold just to US consumers. How much disappeared to overseas? I still suspect the numbers I posted are representative but I'm not sure if the numbers just posted are accurate either. And also: "...consumption of petroleum products" doesn't denote who consumed them...just that someone did: US or foreign consumers.

The truth is out there somewhere. Won't be able to dig into further until this weekend.

[GoghGoner]

Funny, the UK consumption is perfectly correlated to gasoline taxes.

In the 1993 Budget during the Major ministry Norman Lamont introduced a 10p rise and also a 'Fuel Price Escalator' whereby the cost of fuel would be increased annually by 3 per cent above inflation in future years; the Petroleum revenue tax was reduced in the same budget and later abolished. Kenneth Clarke, the new chancellor, increased the escalator to 5p in November of that year. These increases were introduced at a time of considerable change in government transport policy, and followed major UK road protests, including the M11 link road protest and the protest at Twyford Down.[4] The escalator was increased in 6p per year in 1997 by the Gordon Brown, chancellor for the new Blair ministry.

[daveintex13]

Weekly U.S. Product Supplied of Finished Motor Gasoline (Thousand Barrels per Day)

11/24/2006 9,320 thous bopd
11/28/2014 9,425 thous bopd

~1.1% increase from last week of November 2006 to last week of November 2014.

Source: http://www.eia.gov/dnav/pet/hist/LeafHa ... FUPUS2&f=W

[Loki]

But if these commodities "disappear" from the sources it doesn't mean they were sold just to US consumers. How much disappeared to overseas? I still suspect the numbers I posted are representative but I'm not sure if the numbers just posted are accurate either. And also: "...consumption of petroleum products" doesn't denote who consumed them...just that someone did: US or foreign consumers.

Rockman, the "US Product Supplied" dataset apparently includes both gasoline exports and gasoline imports (check out how much imports have dropped).

EIA's definition of "product supplied":

In general, product supplied of each product in any given period is computed as follows: field production, plus refinery production, plus imports, plus unaccounted for crude oil, (plus net receipts when calculated on a PAD District basis), minus stock change, minus crude oil losses, minus refinery inputs, minus exports.

http://www.eia.gov/dnav/pet/TblDefs/pet ... bldef2.asp

Of course I found this definition after I crunched a bunch of numbers to account for changes in imports and exports. Oh well. I'll post these (invalid) figures here anyway. They double count exports, but even so exports aren't all that important:

First column: U.S. Product Supplied of Finished Motor Gasoline (Thousand Barrels)

Second column: U.S. Exports of Finished Motor Gasoline (Thousand Barrels)

Third column: Domestic Consumption (Thousand Barrels) (my calculation)

2000 -- 3,100,774 -- 52,539 -- 3,048,235
2001 -- 3,142,660 -- 48,485 -- 3,094,175
2002 -- 3,229,459 -- 45,315 -- 3,184,144
2003 -- 3,261,237 -- 45,770 -- 3,215,467
2004 -- 3,332,579 -- 45,498 -- 3,287,081
2005 -- 3,343,131 -- 49,473 -- 3,293,658
2006 -- 3,377,174 -- 51,765 -- 3,325,409
2007 -- 3,389,269 -- 46,369 -- 3,342,900
2008 -- 3,290,057 -- 62,841 -- 3,227,216
2009 -- 3,283,730 -- 71,326 -- 3,212,404
2010 -- 3,282,319 -- 107,963 -- 3,174,356
2011 -- 3,194,754 -- 174,776 -- 3,019,978
2012 -- 3,177,687 -- 149,657 -- 3,028,030
2013 -- 3,227,689 -- 136,146 -- 3,091,543

[ROCKMAN]

And again can you explain the confusion. Here’s the link from the same folks we are all looking at: the EIA.

http://www.eia.gov/dnav/pet/hist/LeafHa ... 600001&f=m

And very clearly the chart is labeled “U.S. Total Gasoline Sales by Refiners”. Is the trick that they don’t say who they are selling to? But clearly is says US refiners have reduced their sales of gasoline from 60 million gal/day in 2006 to 25 million gal/day in 2013. That’s their chart saying that…not me.

But maybe what’s missing is imports of gasoline. So here’s that EIA chart:

http://www.eia.gov/dnav/pet/hist/LeafHa ... _mbbld&f=4

So in 2006 we were importing about 480,000 bbls per day of “Finished Motor Gasoline”…or 20.1 million gallons per day. But recently that number has fallen to around 60,000 bbls per day…or 2.5 million gal/day.

So the EIA say refiners are selling about 25 million gal/day and we’re importing 2.5 million gal/day that’s total of 27.5 million gal/day.
And from their same chart: Refiners were selling 60 million gal/day in 2006 while they were importing 20 million gal/day. So a total of 80 million gal/day? But maybe this is the trick: they don’t specifically say the refiners are selling X bbls per day of gasoline produced in the US: maybe the “sales” number includes well imported gasoline. But if so the numbers still don’t make sense.

So how does this work: according to the same source we consumed 134 billion gallons of gasoline in 2013. And we imported about 800 million bbls of “Finished Motor Gasoline” in 2013 and “Total Gasoline Retail Sales by Refiners” in 2013 was 9 billion gallons for the year. Obviously those numbers make no sense. But the 134 billion gallons doesn’t seem unrealistic either: 134 billion gallons/200 million vehicle = 670 gallons per year per vehicle…or about 2 gallons per day per vehicle. Can someone figure out what’s wrong?

[Loki]

And again can you explain the confusion. Here’s the link from the same folks we are all looking at: the EIA.

http://www.eia.gov/dnav/pet/hist/LeafHa ... 600001&f=m

And very clearly the chart is labeled “U.S. Total Gasoline Sales by Refiners”. Is the trick that they don’t say who they are selling to? But clearly is says US refiners have reduced their sales of gasoline from 60 million gal/day in 2006 to 25 million gal/day in 2013. That’s their chart saying that…not me.

They're presumably selling on the domestic wholesale market. The export numbers have increased in recent years, but nowhere near 35 million gal/day. Increased exports only account for about a quarter of this disparity by my figuring.

U.S. Exports of Finished Motor Gasoline (Thousand Barrels) (third column is my calculation assuming 42 gals per barrel)

YEAR -- TH_BBLS -- GALS
2006 -- 51765 -- 2,174,130,000
2007 -- 46369 -- 1,947,498,000
2008 -- 62841 -- 2,639,322,000
2009 -- 71326 -- 2,995,692,000
2010 -- 107963 -- 4,534,446,000
2011 -- 174776 -- 7,340,592,000
2012 -- 149657 -- 6,285,594,000
2013 -- 136146 -- 5,718,132,000

-- 35 million gals/day * 365 days = 12,775,000,000 gals/year
-- Difference between 2013 exports and 2006 exports = 3,544,002,000 gals/year
-- 3,544,002,000 / 12,775,000,000 = 27.7%

27.7% isn't inconsiderable, but not the whole story.

So how does this work: according to the same source we consumed 134 billion gallons of gasoline in 2013. And we imported about 800 million bbls of “Finished Motor Gasoline” in 2013 and “Total Gasoline Retail Sales by Refiners” in 2013 was 9 billion gallons for the year. Obviously those numbers make no sense.

How so? I don't know the ins and outs of the refinery business, but it doesn't surprise me most of the product is wholesaled. I'm actually surprised so much gasoline used to be retailed directly by refiners.

[Loki]

Weekly U.S. Product Supplied of Finished Motor Gasoline (Thousand Barrels per Day)

11/24/2006 9,320 thous bopd
11/28/2014 9,425 thous bopd

~1.1% increase from last week of November 2006 to last week of November 2014.

Source: http://www.eia.gov/dnav/pet/hist/LeafHa ... FUPUS2&f=W

Welcome to the board Dave. Nice to see someone making a substantive first post.

We're still down year to date, 95.1% in 2014 relative to 2006.

First 48 weeks of 2006 = 445,398 thousand barrels
First 48 weeks of 2014 = 423,579 thousand barrels

But you're right, there has been a very slight uptick in an otherwise flat-lined trend.