Economics 101 : Shortages of oil + refiners at capacity = Gas prices rise

Platts, the leading oil market service reports that OPEC average production was 26.57 million barrels of crude oil per day in April, which is 770,000 b/d above their 25.8 million b/d production target.

This is a tiny increase overall of 30,000 barrels per day (b/d) from March's 26.54 million b/d - remember OPEC supply a bit more than a third of the world's needs which are said to be 85.5 million bpd - ish.Nigerian outages due to political unrest has risen to 815,000 (bpd) in early May.

John Kingston, Platts global director of oil and leading industry commentator is quoted " .... these numbers have to be viewed as worrisome for consumers," "Although the International Energy Agency (IEA) projects that OPEC only needs to supply the market with 29.3 million b/d in the second quarter to keep inventories balanced, from a full-year perspective it must supply about 30.4 million b/d," he explained, with the heaviest supply needs coming in the third and fourth quarters respectively, of 30.5 million b/d and more than 31 million p/d.

"So OPEC has to add a significant amount of supply in the market, just to keep inventories from declining further later this year," Kingston said. "And those estimates don't include any extra surge of OPEC oil that would be needed should the US Gulf of Mexico get hit by a significant hurricane in the coming months."

OPEC decided to maintain current supplies at a meeting in March and is not expected to meet next in September to discuss and chart future roduction production policy.

The Paris based International Energy Agency have again called today (in their Monthly Oil Market Report) for OPEC to increase output for the third month running.

“We see a big, 1.6 million barrel a day crank up in global demand in June and there are still constraints in the refining side,” said Lawrence Eagles, head of the IEA's Oil Industry and Markets Division.

The IEA reports that fuel inventories in the industrialized countries, which are members of the Organisation for Economic Co-operation and Development, have shrunk by an “unusually high” 900,000 barrels per day (bpd) during the past six months. Gasoline inventories in the United States (affected by low refinery utilisation by shutdowns and maintenance and probably a bit of market rigging) have sunk to a 16-year low for the time of year, pushing pump prices above $3 nationwide to record levels.

The national average price of a gallon (3.7 liters) of regular gas reached 3.035 USD this week according to AAA and the Oil Price Information Service. a few cents below the record prices set after the 2005 hurricanes.

No new refineries have been built in the U.S. in more than 30 years, mainly because environmental rules governing emissions have rendered the costs prohibitive, and because community and environmental activists fiercely oppose designating new sites for facilities - they are also suffering a squeeze on labour with an ageing workforce.

D.J. Peterson and Sergej Mahnovski did an in -depth analysis of the U.S. oil refining industry, which was published as a report by the RAND Corporation on August 28, 2003 "New Forces at Work in Refining" (ISBN: 0-8330-3436-7) which was ignored by the political leaders.

Lord Patel has nagged people to read the report - here is a remarkably prophetic piece from the Rand Press Release at the time ...

The industry shakeout has left just 58 companies operating refineries, a dramatic consolidation from the 189 refining firms 22 years ago. The remaining plants now operate at 92 percent of their capacity, up from 78 percent in 1985.

The decline in unused manufacturing capacity and other efficiencies allowed the industry in 2001 to report the highest profit margins seen by the Energy Information Administration since it started collecting the information in 1979.

The reduction of spare capacity has helped drive up prices at the pump and leaves the market vulnerable to shortages caused by a plant breakdown or other unpredictable events. Industry leaders appear to have accepted the situation, seeing no economic logic in straining for more capacity.

"I think the industry has learned that it's okay to fall short on product," said an industry observer. "There is no reward being long on product or production capacity."

Added another: "Every investment a refiner makes is stranded in his eyes…you win by doing nothing."

That was when Lord Patel bought into Valero up US$1.58 (2.2%) today - it's hardly rocket science. See this when the topic was first raised.