WHY OIL COSTS MORE: CASE STUDY – SUPPLY AND DEMAND

Why? Because inventory – marginal supply – is not what it used to be. In fact, SUPPLY is not what it used to be. More things than ever before that threaten to interrupt it: severe hurricanes in the Gulf, heightening tensions all over the Mid-East, violence and kidnappings in Africa, sabotage in Mexico. Meanwhile, DEMAND is only going one way, UP. (7th in the WHY OIL COSTS MORE series: KAZAKHSTAN, SAUDI ARABIA, NIGERIA, VENEZUELA, INDIA, CHINA, JAPAN, RIGS)


Oil hits record on big inventory drop; Crude supplies fall by over 7 million barrels, pusing oil prices past $79; gasoline stocks fall for 6 weeks straight.
September 12, 2007 (CNN Money)
and
New York oil price flirts with record as US energy reserves dive
September 6, 2007 (AFP)

WHO
The Energy Information Administration (EIA), statistics branch of the U.S. Department of Energy (DOE); Organization of Petroleum Exporting Countries (OPEC)

The economics is pretty basic. (click to enlarge)

WHAT
EIA reported crude oil inventory in the US was down 7.1 million barrels in the first week of September instead of the expected 2.7 million barrel decrease. Resultant oil price: $80+/barrel, an all-time high. OPEC’s announced increase of output did nothing to stop surging price.

WHEN
Now.

Demand: Not much is likely to change here. (click to enlarge)

WHERE
U.S. inventories

WHY
- OPEC announced it would increase official output by 500,000 barrels/day.
- Gasoline supply was down 700,000 barrels (200,000 greater than expected), the 6th consecutive week of falling inventory.
- Distillates for heating oil and diesel fuel were up 1.8 million barrels, 400,000 bareels over expectations.
- Refineries were operating at 90% capacity, below the 92+% expectation in a market hungry for refined products.

Supply. (click to enlarge)

QUOTES
- Adam Sieminski, chief energy economist, Deutsche Bank: "The combination of robust long-term demand growth and lagging non-OPEC supply suggests that strong support for oil prices is set to remain a feature of the markets beyond 2010…"
- Mike Fitzpatrick, MF Global: "It is particularly impressive that crude oil was able to shake off…weak economic news and sharp sell off in the equities…The apparent disconnect between energy and the stock market should be a clear indication that energy markets, while abiding at times of macro issues, are more concerned with supply issues than a possible softening in demand, at this point."